THE    HANDBOOK    SERIES 


CURRENT  PROBLEMS 
IN  TAXATION 


THE  HANDBOOK  SERIES 

AGRICULTURAL  CREDIT $1 .25 

AMERICANIZATION,  2  d  eJ., 1 .80 

CLOSED  SHOP 1.80 

DISARMAMENT 2.25 

EUROPEAN  WAR,  VOL.  II 1 .25 

IMMIGRATION 1 .80 

INDUSTRIAL  RELATIONS 

EMPLOYM'T  MANAGEM'T...  2.40 

MODERN    INDUSTRIAL 
MOVEMENTS  2.40 

PROBLEMS  OF  LABOR 2.40 

LEAGUE  OF  NATIONS,  4th  ed.  1 .50 

NEGRO  PROBLEM -  2.25 

PRISON  REFORM 1.25 

SHORT  BALLOT 1 .25 

SOCIALISM  1 .25 

STUDY  OF  LATIN  AND  GREEK  1 .80 

TAXATION  2.25 

VOCATIONAL  EDUCATION 2.25 


THE    HANDBOOK    SERIES 


SELECTED  ARTICLES  ON 

CURRENT  PROBLEMS 
IN  TAXATION 


COMPILED  BY 

LAMAR  T.  BEMAN,  A.  M.,  LL.  B. 

ATTORNEY  AT  LAW 

CLEVELAND,  O. 


NEW  YORK 

THE  H.  W.  WILSON  COMPANY 

LONDON  :  GRAFTON  &  CO. 

1921 


PUBLISHED  DECEMBER,  1921 
Printed  in  the  United  States  of  America 


EXPLANATORY  NOTE 

The  tremendous  burden  of  war  debt  that  is  now  borne  by 
our  federal  government,  the  interest  on  which  must  be  met 
annually  and  the  principal  of  which  must  be  slowly  paid  off, 
makes  the  subject  of  taxation  an  important,  even  if  an  unpleasant, 
issue  in  our  national  affairs.  In  state  and  local  matters  taxation 
is  also  made  an  important  question  by  the  ever  increasing 
demand  for  additional  funds  and  by  the  loss  of  the  revenue 
formerly  obtained  from  the  taxes  on  the  liquor  traffic.  The 
pressing  need  of  the  states,  and  more  particularly  of  the  cities 
and  other  local  governments,  for  increased  revenue  has  been 
constantly  growing  more  acute  because  modern  progress  demands 
of  these  governmental  agencies  more  and  better  service. 

Amazing  and  disheartening,  under  these  conditions,  are  the 
evidences  of  misunderstanding  of  so  vital  public  issues  as  the 
different  phases  of  the  taxation  problem.  One  prominent  business 
man  testified  before  the  Ways  and  Means  Committee  that  he 
did  not  think  that  there  was  any  such  thing  as  a  science  of 
taxation !  On  another  occasion  a  business  man  of  prominence 
declared  in  a  public  address  that  all  taxes  are  consumption  taxes ! 
In  many  pamphlets  that  have  been  widely  distributed  careful 
arguments  are  given  to  show  that  a  certain  proposed  tax  will  be 
so  "painless"  that  nobody  will  really  notice  it,  but  that  it  will 
yield  between  $3,000,000,000  and  $5.000,000,000  of  revenue  each 
year;  $150  a  year  from  the  average  family  and  nobody  notice 
it !  We  read  in  another  pamphlet  that  a  certain  tax  is  so  popular 
in  the  Philippines  that  "a  revolution  would  occur  if  any  attempt 
were  made  to  repeal  it!"  A  printed  report  by  a  state  tax  com- 
mission quotes  at  some  length  from  Henry  C.  Adams's  Public 
Finance  and  says  that  it  is  giving  the  words  of  Professor 
Thomas  S.  Adams  of  Yale.  A  report  on  federal  taxation  by  a 
special  committee  of  a  great  national  organization  of  business 
men  gives  the  "Four  maxims  of  Adam  Smith"  but  entirely 
omits  the  first  and  chief  of  his  maxims.  More  amazing  still  were 
the  revelations  made  a  decade  ago  by  Professor  Seligman 
concerning  the  circumstances  that  surrounded  the  annulment  by 


463313 


vi  EXPLANATORY  NOTE 

the   United   States    Supreme   Court   of   the   federal   income   tax 
in  1895.     (See  Seligman,  The  Income  Tax.    Part  II.    Chapter  5) 

These  things  show  that  to  the  group  of  vital  problems  con- 
cerning taxation  there  must  be  brought  more  earnest  thought 
and  study  and  more  sincerity.  Too  long  has  taxation  been  a 
matter  of  indifference  and  unreasonable  criticism.  It  is  the 
purpose  of  this  volume,  like  the  other  volumes  of  the  Handbook 
series,  to  make  information  on  a  vital  public  question  easily 
available  by  reproducing  the  best  that  has  been  written  on  each 
side. 

In  Part  I  is  given  some  of  the  general  principles  of  taxation. 
It  deals  especially  with  the  question  of  apportionment  and 
presents  it  in  historical  perspective.  Part  II  deals  with  the 
proposed  Sales  Tax.  Part  III  takes  up  the  State  Income  Tax. 
In  each  part  is  a  selected  bibliography.  In  Parts  II  and  III 
where  debatable  questions  are  considered,  a  brief  is  given  on 
each  side. 

LAMAR  T.  BEMAN 
October  I,   1921. 


CONTENTS 

PART  I 

GENERAL  PRINCIPLES  OF  TAXATION 

PAGE 

BIBLIOGRAPHY 3 

INTRODUCTION     7 

DISCUSSION 

Adam  Smith's  Four  Maxims   9 

Mill,  John  Stuart.     General  Principles  of  Taxation 12 

Walker,  Francis  A.     Principles  of  Taxation 18 

Adams,  Henry  C.     The  Principle  of  Apportionment 26 

Seligman,  Edwin  R.  A.     The  Fundamental  Problems 36 

Brief  Excerpts   49 

PART  II 
THE  SALES  TAX 

BRIEF    53 

BIBLIOGRAPHY  59 

INTRODUCTION    67 

AFFIRMATIVE  DISCUSSION 

Bache,  Jules   S.     Why  Not  a  Sales  Tax 

Review   of   Reviews    71 

Orcutt,  B.  S.     Why  a  Sales  Tax Administration    78 

Sales  Tax  Experience  New  York  Times    89 

Smoot,  Reed.     Proposed   Sales  Tax 

Congressional  Record    91 

Lord,  Charles  E.     Brief  Filed  with  the  Tax  Committee  of 

the  National  Industrial  Conference  Board 102 

National    Association    of    Manufacturers.     Committee    on 

Taxation.  Report no 

An  Income  Tax  Lesson Wall  Street  Journal  115 

Brief  Excerpts   116 

NEGATIVE  DISCUSSION 

Sales  or  Turnover  Tax Report.   National  Industrial  Con- 
ference Board.     Tax  Committee.  Report  125 


viii  CONTENTS 

Staub,  Walter  A.     Why  Not  a  Sales  Tax 

Administration  142 

Gompers,  Samuel.  Sales  Tax— An  Iniquitous  Proposal.. 

American  Federationist  159 

Substitutes  for  the  Profits  Tax New  Republic  161 

Graham,  Whidden.  Where  is  the  Tax  Burden  Going 

Nation  163 

Adams,  Thomas  S.  Difficulties  of  the  Sales  Tax 166 

Frear,  James  A.  A  War  Sales  Tax  During  Peace 171 

Brief  Excerpts  198 

PART  III 
THE  STATE  INCOME  TAX 

BRIEF    207 

BIBLIOGRAPHY    213 

INTRODUCTION  223 

GENERAL  DISCUSSION 

Failure  of  the  Personal  Property  Tax 225 

Proposed  Personal  Income  Tax 246 

What  Rigid  Enforcement  Would  Mean  254 

Brief  Excerpts   256 

AFFIRMATIVE  DISCUSSION 

Income   Tax.   Michigan.    1920.    Report 261 

Advantages  of  the  Income  Tax.  New  York.  1916.  Report..  279 

Income   Tax.  Louisiana.    1921.   Report    289 

Ely,  Richard  T.     Income  Taxes   300 

Brief  Excerpts    303 

NEGATIVE  DISCUSSION 

Taxation  of  Incomes.  New  York.  1907.  Report 307 

State  Income  Taxes.  Minnesota.  1910.  Report 318 

Minority  Report.    New  York  1916  Joint  Committee 322 

Russell,   Campbell.     Taxation   in   Oklahoma 336 

Minority  Report.     Assessment  and  Taxation  Commission  of 

Louisiana.  1921 34° 

The   Income   Tax.     Civic   Federation   of    Chicago 342 

Brief  Excerpts   315 


PART  I 
GENERAL  PRINCIPLES  OF  TAXATION 


BIBLIOGRAPHY 

An  asterisk  (*)  preceding  a  reference  indicates  that  the  article  or  a 
part  of  it  has  been  reprinted  in  this  volume.  A  dagger  (t)  is  used  to 
indicate  a  few  of  the  other  best  references. 

OTHER  BIBLIOGRAPHIES 

American  Economic  Review  (quarterly)   indexes  in  each  issue 

the  new  material,  books,  articles  in  periodicals,  pamphlets  and 

documents  on  taxation  and  public  finance. 
Bulletin  of  the  National  Tax  Association  (monthly)  lists  in  each 

issue  the  new  publications  on  taxation. 
Library  of  Congress.     List  of  references  on  excise  or  internal 

revenue  taxation,  with  special  reference  to  consumption  taxes. 

1918.    typewritten.    8p. 
Plehn,    Carl    C.      Introduction    to    public    finance.     Macmillan. 

1920. 

P-  435-7-    Brief  bibliography  for  supplementary  reading. 
Seligman,  Edwin  R.  A.    The  shifting  and  incidence  of  taxation. 

Columbia  University  Press.     1910. 

p.  399-424.    Bibliography. 
Seligman,  Edwin  R.  A.     Essays  in  taxation.     Macmillan.     1911. 

422-4.    Bibliography  of  American  reports  on  taxation. 

BOOKS  AND  PAMPHLETS 

*Adams,    Henry   C.     The   science   of   finance.     Henry   Holt   & 

~o.     1905. 

\itage-Smith,  G.    Principles  and  methods  of  taxation.     John 

Murray  (London).    1919. 

-table,   C.   F.     Public  finance.     Macmillan.     1895. 
,  W.  D.  P.     New  encyclopedia  of  social  reform.     Funk  & 

vVagnalls.     1908. 

p.   1193-1202.    Taxation. 
Bogart,  Ernest  L.     Direct  cost  of  the  present  war.     Carnegie 

endowment  for  international  peace.    Oxford  University  Press. 

1918. 
Bogart,  Ernest  L.     Direct  and  indirect  costs  of  the  great  war. 

1919. 


S£'L£(-f  £l>*  ARTICLES 

tBullock;  :Ch*ai-fe"s;  -J.-*  'Select  ,mdjngs  in  public  finance.     Ginn 

&  Co.     1920. 

Cohn,  Gustav.  (tr.  T.  B.  Veblen)  The  science  of  finance.    Uni- 
versity of  Chicago  Press.     1895. 
Cooley,  Thomas  M.     Law  of  taxation.     1886. 
Cossa,  Luiga.   (tr.  Horace  White)   Taxation,  its  principles  and 

methods.     G.  P.  Putnam's  sons.     1889. 
Curtis,    Vanderveer.      The    state    tax    system    of    Washington. 

Extension    Division,    University    of    Washington.      1916. 
Daniels,  Winthrop  M.     The  elements  of  finance.     Henry  Holt 

&  Co.     1899. 
Ely,  Richard  T.  and  Finley,  John  H.     Taxation  in  American 

states  and  cities.     Thomas  Y.  Crowell  &  Co.     1888. 
Ely,  Richard  T.     Outlines  of   economics.     Macmillan.     1919. 

Chap.  34.    p.  711-39.    Federal,  state,  and  local  taxes. 
Ely,  Richard  T.     Studies  in  the  evolution  of  industrial  society. 

Macmillan.    1903. 

Part  2,  Chap.  8,  p.  315-30.     The  Evolution  of  Public  Expenditures. 
Fairlie,  John  A.     A  report  on  the  taxation  and  revenue  system 

of  Illinois.     Illinois  Printing  Co.     1910. 
Fetter,   Frank  A.     The  principles  of   economics.     Century  Co. 

1904. 

Chap.  49.    p.  471-9.    Taxation  in  its  relation  to  value. 
Fillebrown,  C.  B.     Taxation.    A.  C  McClurg  &  Co.     1914. 
Hobson,  J.  A.  Taxation  in  the. new  state.     Harcourt,  Brace  & 

Howe.     1920. 
Holmes,  George  E.    Federal  income  tax,  war  profits  and  excess 

profits  taxes.     1920. 
Howe,  Frederick  C.     Taxation  and  taxes  in  the  United  States 

under  the  internal  revenue  system,  1791-1895.    T.  Y.  Crowell 

&  Co.     1896. 
Judson,  F.  N.     A  treatise  on  the  power  of  taxation,  state  and 

federal,  in  the  United  States.     F.  H.  Thomas  law  book  Co. 

1917. 
Lyon,    Hastings.      Principles    of    taxation.      Houghton,    Mifflin 

&  Co.     1914- 
Mathews,   Frederic.     Taxation  and  the  distribution  of   wealth. 

Doubleday,  Page  &  Co.    1914. 
Means,  David  M.    The  methods  of  taxation  compared  with  the 

established  principles  of  justice.     Dodd,  Mead  &  Co.     1909 


TAXATION  5 

Mill,  John  Stuart.     Principles  of  political  economy. 
*Book  5,  Chap.  2.      Of   the   general   principles   of   taxation. 
Book  5,  Chap.  3.      Of   direct   taxes. 
Book  5,  Chap.  4.      Of  taxes  on  commodities. 
Book  5,  Chap.  5.     Of  some  other  taxes. 
Book  5,  Chap.  6.     Comparison  between  direct  and  indirect  taxation. 

Montgomery,  Robert  H.     Income  tax  procedure  in    1921.     The 

Ronald  Press  Co.     1921. 
National    Conference   on   taxation,    under   the   auspices    of    the 

national  civic  federation.     Buffalo,  1901. 
National    Industrial    Conference    Board.      Proceedings    of    the 

(first)    national    industrial   tax    conference    at    Chicago,    111. 

April   16,   1920.     Special  report  no.  9.     H3p.     1920. 
National    Industrial    Conference    Board.      Proceedings    of    the 

second  national  industrial  tax  conference,   New  York,   Oct. 

1920.     Special  report  no.  17.    I96p.    1920. 
fNational    Tax    Association.      Annual    Conferences,    Addresses 

and  proceedings.     1907  and  annually  thereafter.     Macmillan. 
tPlehn,    Carl    C.      Introduction    to   public   finance.      Macmillan. 

1920. 
Proceedings  of  Conference  held  to  consider  the  question  of  tax 

reform    at    Richmond,    Va.,    Jan.    20-21,    1914.      Whittet    & 

Shepperson.     1914.     68p. 
Seager,  Henry  R.     Introduction  to  economics.     Henry  Holt  & 

Co.    1008. 

Chap.  28.  p.   563-88.     Taxation  and  tax  reform  in  the  United  States. 
tSeligman,  Edwin  R.  A.    Essays  in  taxation.    Macmillan.    1895. 
Seligman,   Edwin   R.   A.     Financial   statistics  of  the   American 

commonwealths.     American   statistical  association.     1889. 
*Seligman,  Edwin  R.  A.     The  income  tax.     Macmillan.     1911. 

p.    1-38.    The  General  Problems. 
tSeligman,   Edwin,   R.   A.     Progressive  taxation  in  theory  and 

practice.     1908. 
tSeligman,   Edwin   R.  A.     Shifting  and   incidence  of  taxation. 

Macmillan.     1910. 
*Smith,  Adam.     An  inquiry  into  the  nature  and  causes  of  the 

wealth  of  nations.     1776. 

Book  5.   Chap.    2.     Of  the  sources  of  the  general  or  public  revenue  of 
the  society. 
*Walker,   Francis   A.     Political   economy.     Henry  Holt   &   Co. 

1888. 

Part  6.  Chap.  16.  p.  488-505.    The  principles  of  taxation. 
Wells,    David   A.     The   theory   and   practice    of    taxation.      D. 

Appleton  &  Co.    1907. 


6  SELECTED   ARTICLES 

PERIODICALS 

Annals  of  the  American  Academy.  58  :  i-n.  Mr.  '15.  Newer 
tendencies  in  American  taxation.  Edwin  R.  A.  Seligman. 

Bulletin  of  the  University  of  Washington.  University  Extension 
series  no.  12.  General  series  no.  84.  Ag.  '14.  Taxation  in 
Washington;  papers  and  discussions  of  the  state  tax  con- 
ference at  the  University  of  Washington  May  27-9,  1914. 

Columbia  University  Quarterly.  18  :  122-35.  Mr.  '16.  The  rela- 
tions of  federal,  state,  and  local  revenue.  Edwin  R.  A. 
Seligman. 

Economic  Journal.  4  : 639-67.  D.  '94.  The  American  income 
tax.  Edwin  R.  A.  Seligman. 

Equity  Series.  7  : 1-168.  Ap.  '05.  The  elements  of  taxation. 
Newton  M.  Taylor. 

Fortnightly  Review.  108  1499-510.  Mr.  '21.  Rates  and  taxes. 
J.  E.  Allen. 

Indiana  University  Bulletin.  12  :  1-189.  F.  '14.  Proceedings 
of  a  conference  on  taxation  in  Indiana. 

Johns  Hopkins  University  Studies.  18  :  1-253.  Ja-Ap.  'oo. 
Studies  in  state  taxation  with  particular  reference  to  the 
southern  states.  J.  H.  Hollander. 

League  of  Nations.  4  :  299-364.  Ag.  '21.  The  staggering  burden 
of  armament ;  II  What  America  has  spent  for  war  and  peace. 
World  Peace  Foundation. 

Public  Opinion.  13  : 49-54.  Ap.  23,  '92.  Changes  necessary  to 
secure  equitable  taxation.  Walter  E.  Weyl,  Robert  Luce, 
Bolton  Hall. 

Political  Science  Quarterly.  13  1442-76.  S.  '98.  Direct  and 
indirect  taxes  in  economic  literature.  Charles  J.  Bullock. 

Political  Science  Quarterly.  3  : 1-16.  Mr.  '88.  The  bases  of 
taxation.  Francis  A.  Walker. 

Quarterly  Journal  of  Economics.  9  : 26-46.  O.  '94.  The  new 
income  tax.  Charles  F.  Dunbar. 

Reports  from  the  Consuls  of  the  United  States,  nos.  99-100. 
N.  D.  '88.  Taxation  in  various  countries. 

Review  of  Reviews.  63  : 172-5.  F.  '21.  How  the  taxpayers' 
money  is  spent.  Stanley  H.  Howe. 


INTRODUCTION 

"It  is  nevertheless  probably  true  that  there  is  not,  at  the 
present  time,  a  single  existing  tax  decreed  by  despotism, 
or  authorized  by  the  representatives  of  the  taxpayers,  which  has 
been  primarily  adopted  or  enacted  with  reference  to  any  involved 
economic  principles,  or  which  has  primarily  sought  to  establish 
the  largest  practical  conformity,  under  the  existing  circumstances, 
to  what  are  acknowledged  to  be  the  fundamental  principles  of 
equity,  justice,  and  rational  liberty."  These  were  not  the  rash 
words  of  any  violent  and  unthinking  radical  in  whose  clouded 
mind,  conscious  of  many  social  wrongs  and  personal  misfortunes, 
were  some  vague  ideas  of  a  visionary  scheme  of  taxation  that 
would  better  the  condition  in  life  of  the  most  unfortunate  of 
mankind.  They  were  the  words  of  David  A.  Wells,  one  of 
America's  foremost  scholars  and  practical  experts  in  taxation, 
a  man  who  had  prepared  fifteen  reports  for  the  government  of 
the  United  States,  had  served  four  years  as  special  commissioner 
of  revenue  for  the  federal  government,  and  was  a  member  of 
the  faculty  at  Yale. 

Congressmen  and  legislators  all  too  often  follow  the  maxim 
of  Colbert,  that  "The  art  of  taxation  consists  in  so  plucking  the 
goose  as  to  procure  the  largest  quantity  of  feathers  with  the 
least  possible  amount  of  hissing,"  rather  than  the  classic  maxims 
of  Adam  Smith  or  the  enlightened  discussions  of  later  econom- 
ists. They  know  that  some  classes  make  more  hissing  than 
others,  and  the  frequency  of  elections  all  too  often  makes 
uppermost  in  their  minds  the  matter  of  their  own  reelection. 

In  1776,  the  year  made  famous  by  the  adoption  of  the 
American  Declaration  of  Independence,  Adam  Smith  published 
his  Inquiry  into  the  Nature  and  Causes  of  the  Wealth  of 
Nations.  In  the  following  pages  we  quote  from  this  great 
and  epoch  making  work  the  four  classic  maxims  concerning 
taxation  and  give  some  of  the  best  of  the  later  comment  upon 
them  by  the  ablest  authorities  of  different  generations.  This 


8  SELECTED   ARTICLES 

and  some  of  the  more  recent  discussions  of  the  general  principles 
are  given  as  the  first  part  of  this  volume,  to  give  the  reader  a 
foundation  for  the  problems  taken  up  in  the  second  and  third 
parts. 


DISCUSSION 

ADAM  SMITH'S  FOUR  MAXIMS  1 

The  private  revenue  of  individuals,  it  has  been  shown  in  the 
first  book  of  this  inquiry,  arises  ultimately  from  three  different 
sources :  rent,  profit,  and  wages.  Every  tax  must  finally  be  paid 
from  some  one  or  other  of  those  three  different  sorts  of  revenue, 
or  from  all  of  them  indifferently.  I  shall  endeavor  to  give  the 
best  account  I  can,  first,  of  those  taxes  it  is  intended  should 
fall  upon  rent;  second,  of  those  which  it  is  intended  should  fall 
upon  profit;  third,  of  those  which  it  is  planned  should  fall  upon 
wages;  and,  fourth,  of  those  which  it  is  intended  should  fall 
indifferently  upon  all  those  three  different  sources  of  private 
revenue.  The  particular  consideration  of  each  of  these  four 
different  sorts  of  taxes  will  divide  the  second  part  of  the  present 
chapter  into  four  articles,  three  of  which  will  require  several 
other  subdivisions.  Many  of  those  taxes,  it  will  appear  from 
the  following  review,  are  not  finally  paid  from  the  fund  or 
source  of  revenue,  upon  which  it  was  intended  they  should  fall. 

Before  I  enter  upon  the  examination  of  particular  taxes,  it  is 
necessary  to  premise  the  four  following  maxims  with  regard  to 
taxes  in  general. 

I.  The  subjects  of  every  state  ought  to  contribute  toward 
the  support  of  the  government,  as  nearly  as  possible  in  propor-| 
tion  to  their  respective  abilities;  that  is,  in  proportion  to  the 
revenue  which  they  respectively  enjoy  under  the  protection  oi 
the  state.  The  expense  of  government  to  the  individuals  of 
great  nation  is  like  the  expense  of  management  to  the  joint 
tenants  of  a  great  estate,  who  are  all  obliged  to  contribute  in 
proportion  to  their  respective  interests  in  the  estate.  In  the 
observation  or  neglect  of  this  maxim  consists  what  is  called 
the  equality  or  inequality  of  taxation.  Every  tax,  it  must  be 
observed,  once  for  all,  which  falls  finally  upon  one  only  of  the 
three  sorts  of  revenue  above  mentioned,  is  necessarily  unequal, 

1  By  Adam  Smith.  An  Inquiry  into  the  Nature  and  Causes  of  the 
Wealth  of  Nations.  (1776).  Book  V,  Chap,  i,  Part  2. 


' 


io  SELECTED   ARTICLES 

in  so  far  as  it  does  not  affect  the  other  two.  In  the  following 
examination  of  different  taxes  I  shall  seldom  take  much  further 
notice  of  this  sort  of  inequality,  but  shall,  in  most  cases,  confine 
my  observations  to  that  inequality  which  is  occasioned  by  a 
particular  tax  falling  unequally  even  upon  the  particular  sort  of 
private  revenue  which  is  affected  by  it. 

2.  The  tax  which  each  individual  is   bound  to  pay,    ought 
to  be   certain,   and   not   arbitrary.     The  time   of   payment,   the 
manner  of  payment,   the  quantity  to  be  paid,   ought  all  to  be 
clear  and  plain  to  the  contributor  and  to  every  other  person. 
Where  it  is  otherwise,  every  person  subject  to  the  tax  is  put 
more  or  less  in  the  power  of  the  tax  gatherer,  who  can  either 
aggravate  the  tax  upon  any  obnoxious   contributor,  or  extort, 
by  the  terror  of  such  aggravation,  some  present  or  perquisite 
to  himself.    The  uncertainty  of  taxation  encourages  the  insolence 
and  favors  the  corruption  of  an  order  of  men  who  are  naturally 
unpopular,  even  where  they  are  neither  insolent  or  corrupt.    The 
certainty  of  what  each  individual  ought  to  pay  is,  in  taxation,  a 
matter  of  so  great  importance,  that  a  very  considerable  degree 
of  inequality,  it  appears,  I  believe,  from  the  experience  of  all 
nations,  is  not  near  so  great  an  evil  as  a  very  small  degree  of 
uncertainty. 

3.  Every   tax   ought   to   be   levied   at   the   time,   or   in   the 
manner,   in  which   it   is  most   likely  to   be  convenient   for   the 
contributor  to  pay  it.    A  tax  upon  the  rent  of  land  or  of  houses, 
payable  at  the  same  term  at  which  such  rents  are  usually  paid, 
is  levied  at  the  time  when  it  is  most  likely  to  be  convenient  for 
the  contributor  to  pay ;  or  when  he  is  most  likely  to  have  where- 
withal to  pay.    Taxes  upon  such  consumable  goods  as  are  articles 
of  luxury,  are  all  finally  paid  by  the  consumer,  and  generally 
in  a  manner  that  is  very  convenient  for  him.     He  pays  them 
little  by  little,  as  he  has  occasion  to  buy  the  goods.    As  he  is  at 
liberty  too,  either  to  buy,  or  not  to  buy,  as  he  pleases,  it  must  be 
his  own  fault  if  he  ever  suffers  any  considerable  inconvenience 
from  such  taxes. 

4.  Every   tax   ought   to   be   so    contrived   as   both    to   take 
out  and  to  keep  out  of  the  pockets  of  the  people  as  little  as 
possible  over  and  above  what  it  brings  into  the  public  treasury 
of  the  state.     A  tax  may  either  take  out  or  keep  out  of  the 
pockets  of  the  people  a  great  deal  more  than  it  brings  into  the 
public  treasury,  in  the  four  following  ways.     First,  the  levying 


TAXATION  ii 

of  it  may  require  a  great  number  of  officers,  whose  salaries 
may  eat  up  the  greater  part  of  the  produce  of  the  tax,  and  whose 
perquisities  may  impose  another  additional  tax  upon  the  people. 
Second,  it  may  obstruct  the  industry  of  the  people,  and  dis- 
courage them  from  applying  to  certain  branches  of  business 
which  might  give  maintenance  and  employment  to  great  mul- 
titudes. While  it  obliges  the  people  to  pay,  it  may  thus  di- 
minish, or  perhaps  destroy,  some  of  the  funds  which  might 
enable  them  more  easily  to  do  so.  Third,  by  the  forfeitures 
and  other  penalties  which  those  unfortunate  individuals  incur 
who  attempt  unsuccessfully  to  evade  the  tax,  it  may  frequently 
ruin  them,  and  thereby  put  an  end  to  the  benefit  which  the 
community  might  have  received  from  the  employment  of  their 
capitals.  An  injudicious  tax  offers  a  great  temptation  to  smug- 
gling. But  the  penalties  of  smuggling  must  rise  in  proportion 
to  the  temptation.  The  law,  contrary  to  all  the  ordinary  prin- 
ciples of  justice,  first  creates  the  temptation,  and  then  punishes 
those  who  yield  to  it;  and  it  commonly  enhances  the  punish- 
ment, too,  in  proportion  to  the  very  circumstances  which  ought 
certainly  to  alleviate  it,  the  temptation  to  commit  the  crime. 
Fourth,  by  subjecting  the  people  to  the  frequent  visits  and 
the  odious  examination  of  the  tax-gatherers,  it  may  expose 
them  to  much  unnecessary  trouble,  vexation,  and  oppression; 
and  though  vexation  is  not,  strictly  speaking,  expense,  it  is 
certainly  equivalent  to  the  expense  at  which  every  man  would 
be  willing  to  redeem  himself  from  it.  It  is  in  some  one  or 
other  of  these  four  different  ways  that  taxes  are  frequently  so 
much  more  burdensome  to  the  people  than  they  are  beneficial 
to  the  sovereign. 

The  evident  justice  and  utility  of  the  foregoing  maxims  have 
recommended  them  more  or  less  to  the  attention  of  all  nations. 
All  nations  have  endeavored,  to  the  best  of  their  judgment,  to 
render  their  taxes  as  equal  as  they  could  contrive ;  as  certain,  as 
convenient  to  the  contributor,  both  in  the  time  and  in  the  mode 
of  payment,  and  in  proportion  to  the  revenue  which  they 
brought  to  the  prince,  as  little  burdensome  to  the  people.  .  .  The 
following  short  review  of  some  of  the  principal  taxes  which 
have  taken  place  in  different  ages  and  countries  will  show  that 
the  endeavors  of  all  nations  have  not  in  this  respect  been 
equally  successful. 


12  SELECTED   ARTICLES 


GENERAL  PRINCIPLES  OF  TAXATION1 

The  qualities  desirable,  economically  speaking,  in  a  system 
of  taxation,  have  been  embodied  by  Adam  Smith  in  four  maxims 
or  principles,  which,  having  been  generally  concurred  in  by 
subsequent  writers,  may  be  said  to  have  become  classical,  and 
this  chapter  cannot  be  better  commenced  than  by  quoting  them. 
*  #  * 

The  last  three  of  these  four  maxims  require  little  other 
explanation  or  illustration  than  is  contained  in  the  passage  itself. 
How  far  any  given  tax  conforms  to,  or  conflicts  with  them,  is 
a  matter  to  be  considered  in  the  discussion  of  particular  taxes. 
But  the  first  of  the  four  points,  equality  of  taxation,  requires  to 
be  more  fully  examined,  being  a  thing  often  imperfectly  under- 
stood, and  on  which  many  false  notions  have  become,  to  a 
certain  degree,  accredited,  through  the  absence  of  any  definite 
principles  of  judgment  in  the  popular  mind. 

For  what  reason  ought  equality  to  be  the  rule  in  matters  of 
taxation?  For  the  reason,  that  it  ought  to  be  so  in  all  affairs 
of  government.  As  a  government  ought  to  make  no  distinction 
of  persons  or  classes  in  the  strength  of  their  claims  on  it, 
whatever  sacrifices  it  requires  from  them  should  be  made  to 
bear  as  nearly  as  possible  with  the  same  pressure  upon  all, 
which  it  must  be  observed,  is  the  mode  by  which  least  sacrifice 
is  occasioned  on  the  whole.  If  any  one  bears  less  than  his  fair 
share  of  the  burden,  some  other  person  must  suffer  more  than 
his  share,  and  the  alleviation  to  the  one  is  not,  coeteris  paribus, 
so  great  a  good  to  him,  as  the  increased  pressure  upon  the  other 
is  an  evil.  Equality  of  taxation,  therefore,  as  a  maxim  of  poli- 
tics, means  equality  of  sacrifice.  It  means  apportioning  the 
contribution  of  each  person  toward  the  expenses  of  government, 
so  that  he  shall  feel  neither  more  nor  less  inconvenience  from 
his  share  of  the  payment  than  every  other  person  experiences 
from  his.  This  standard,  like  other  standards  of  perfection, 
cannot  be  completely  realized;  but  the  first  object  in  every 
practical  discussion  should  be  to  know  what  perfection  is. 

There  are  persons,  however,  who  are  not  content  with  the 
general  principles  of  justice  as  a  basis  to  ground  a  rule  of 

*By  John  Stuart  Mill.  Principles  of  Political  Economy.  (1848).  Book  5. 
Chapter  2,  sections  1-3. 


TAXATION  13 

finance  upon,  but  must  have  something,  as  they  think,  more 
specifically  appropriate  to  the  subject.  What  best  pleases  them 
is,  to  regard  the  taxes  paid  by  each  member  of  the  community 
as  an  equivalent  for  value  received,  in  the  shape  of  service  to 
himself;  and  they  prefer  to  rest  the  justice  of  making  each 
contribute  in  proportion  to  his  means,  upon  the  ground,  that 
he,  who  has  twice  as  much  property  to  be  protected,  receives, 
on  an  accurate  calculation,  twice  as  much  protection,  and  ought, 
on  the  principles  of  bargain  and  sale,  to  pay  twice  as  much  for 
it.  Since,  however,  the  assumption  that  government  exists  solely 
for  the  protection  of  property,  is  not  one  to  be  deliberately 
adhered  to;  some  consistent  adherents  of  the  quid  pro  quo 
principle  go  on  to  observe,  that  protection  being  required  for 
persons  as  well  as  property,  and  everybody's  person  receiving 
the  same  amount  of  protection,  a  poll  tax  of  a  fixed  sum  per 
head  is  a  proper  equivalent  for  this  part  of  the  benefits  of 
government,  while  the  remaining  part,  protection  to  property, 
should  be  paid  for  in  proportion  to  property.  There  is  in  this 
adjustment  a  false  air  of  nice  adaptation,  very  acceptable  to 
some  minds.  But  in  the  first  place,  it  is  not  admissable  that 
the  protection  of  persons  and  that  of  property  are  the  sole 
purposes  of  government.  The  ends  of  government  are  as  compre- 
hensive as  those  of  the  social  union.  They  consist  of  all  the 
good,  and  all  the  immunity  from  evil,  which  the  existence  of 
government  can  be  made,  either  directly  or  indirectly,  to  bestow. 
In  the  second  place,  the  practice  of  setting  definite  values  on 
things  essentially  indefinite,  and  making  them  a  ground  of 
practical  conclusions,  is  peculiarly  fertile  in  false  views  of  social 
questions.  It  cannot  be  admitted,  that  to  be  protected  in  the 
ownership  of  ten  times  as  much  property,  is  to  be  ten  times  as 
much  protected.  Whether  the  labour  and  expense  of  the  protec- 
tion, or  the  feelings  of  the  protected  person,  or  any  other  definite 
thing  be  made  the  standard,  there  is  no  such  proportion  as  the 
one  supposed,  nor  any  other  definable  proportion.  If  we  wanted 
to  estimate  the  degrees  of  benefit  which  different  persons  derive 
from  the  protection  of  government,  we  should  have  to  consider 
who  would  suffer  most  if  that  protection  were  withdrawn ;  to 
which  question  if  any  answer  could  be  made,  it  must  be,  that 
those  would  suffer  most  who  were  weakest  in  mind  or  body, 
either  by  nature  or  by  position.  Indeed,  such  persons  would 
almost  infallibly  be  slaves.  If  there  were  any  justice,  therefore, 


14  SELECTED   ARTICLES 

in  the  theory  of  justice  now  under  consideration,  those  who  are 
least  capable  of  helping  or  defending  themselves,  being  those 
to  whom  the  protection  of  government  is  the  most  indispensable, 
ought  to  pay  the  greatest  share  of  its  price;  the  reverse  of  the 
true  idea  of  distributive  justice,  which  consists  not  in  imitating 
but  in  redressing  the  inequalities  and  wrongs  of  nature. 

Government  must  be  regarded  as  so  preeminently  a  concern 
of  all,  that  to  determine  who  are  most  interested  in  it  is  of  no 
real  importance.  If  a  person  or  class  of  persons  receive  so  small 
a  share  of  the  benefit  as  makes  it  necessary  to  raise  the  question, 
there  is  something  else  than  taxation  which  is  amiss,  and  the 
thing  to  be  done  is  to  remedy  the  defect,  instead  of  recognizing 
it  and  making  it  a  ground  for  demanding  less  taxes.  As  in  a 
case  of  voluntary  subscription  for  a  purpose  in  which  all  are 
interested,  all  are  thought  to  have  .done  their  part  fairly  when 
each  has  contributed  according  to  his  means,  that  is,  has  made 
an  equal  sacrifice  for  the  common  object;  in  like  manner 
should  this  be  the  principle  of  compulsory  contributions;  and 
it  is  superfluous  to  look  for  a  more  ingenious  or  recondite 
ground  to  rest  the  principle  upon. 

Setting  out,  then,  from  the  maxim  that  equal  sacrifices  ought 
to  be  demanded  from  all,  we  have  next  to  inquire  whether  this 
is  in  fact-  done,  by  making  each  contribute  the  same  percentage 
on  his  pecuniary  means.  Many  persons  maintain  the  negative, 
saying  that  a  tenth  part  taken  from  a  small  income  is  a  heavier 
burden  than  the  same  fraction  deducted  from  one  much  larger; 
and  on  this  is  grounded  the  very  popular  scheme  of  what  is 
called  a  graduated  property  tax,  viz.  an  income  tax  in  which  the 
percentage  rises  with  the  amount  of  the  income. 

On  the  best  consideration  I  am  able  to  give  to  this  question, 
it  appears  to  me  that  the  portion  of  truth  which  the  doctrine 
contains,  arises  principally  from  the  difference  between  a  tax 
which  can  be  saved  from  luxuries,  and  one  which  trenches,  in 
ever  so  small  degree,  upon  the  necessaries  of  life.  To  take  a 
thousand  a  year  from  the  possessor  of  ten  thousand,  would  not 
deprive  him  of  anything  really  conducive  either  to  the  support  or 
to  the  comfort  of  existence;  and  if  such  would  be  the  effect  of 
taking  £5  from  one  whose  income  is  £50,  the  sacrifice  required 
from  the  last  is  not  only  greater  than,  but  entirely  incommen- 
surable with,  that  imposed  upon  the  first.  The  mode  of  adjusting 


TAXATION  15 

these  inequalities  of  pressure  which  seems  to  be  the  most 
equitable,  is  that  recommended  by  Bentham,  of  leaving  a  certain 
minimum  of  income,  sufficient  to  provide  the  necessaries  of 
life,  untaxed.  Suppose  £50  a  year  to  be  sufficient  to  provide 
the  number  of  persons  ordinarily  supported  from  a  single 
income,  with  the  requisites  of  life  and  health,  and  with  protec- 
tion against  habitual  bodily  suffering,  but  not  with  any  indulgence. 
This  then  should  be  made  the  minimum,  and  incomes  exceeding 
it  should  pay  taxes  not  upon  their  whole  amount,  but  upon  the 
surplus.  If  the  tax  be  10  per  cent,  and  income  of  £60  should  be 
considered  as  a  net  income  of  £10,  and  charged  with  £i  a  year, 
while  an  income  of  £1000  should  be  charged  as  one  of  £950. 
Each  would  then  pay  a  fixed  proportion,  not  of  his  whole  means, 
but  of  his  superfluities.  An  income  not  exceeding  £50  should 
not  be  taxed  at  all,  either  directly  or  by  taxes  on  necessaries; 
for  as  by  supposition  this  is  the  smallest  income  which  labour 
ought  to  be  able  to  command,  the  government  ought  not  to  be 
a  party  to  making  it  smaller.  This  arrangement  however  would 
constitute  a  reason,  in  addition  to  others  which  might  be  stated, 
for  maintaining  taxes  on  articles  of  luxury  consumed  by  the 
poor.  The  immunity  extended  to  the  income  required  for 
necessaries,  should  depend  on  its  being  actually  expended  for 
that  purpose;  and  the  poor  who,  not  having  more  than  enough 
for  necessaries,  divert  any  part  of  it  to  indulgences,  should  like 
other  people  contribute  their  quota  out  of  those  indulgences  to 
the  expenses  of  the  state. 

The  exemption  in  favour  of  the  small  incomes  should  not, 
1  think,  be  stretched  further  than  to  the  amount  of  income 
needful  for  life,  health,  and  immunity  from  bodily  pain.  If 
£50  a  year  is  sufficient  (which  may  be  doubted)  for  these 
purposes,  an  income  of  £100  a  year  would,  as  it  seems  to  me, 
obtain  all  the  relief  it  is  entitled  to,  compared  with  one  of  £1000, 
by  being  taxed  only  on  £50  of  its  amount.  It  may  be  said, 
indeed,  that  to  take  £100  from  £1000  (even  giving  back  £5) 
is  a  heavier  impost  than  £1000  taken  from  £10,000  (giving  back 
the  same  £5).  But  this  doctrine  seems  to  me  too  disputable 
altogether,  and  even  if  true  at  all,  not  true  to  a  sufficient  extent, 
to  be  made  the  foundation  of  any  rule  of  taxation.  Whether 
the  person  with  £10,000  a  year  cares  less  for  £1000  than  the 
person  with  only  £1000  a  year  cares  for  £100,  and  if  so,  how 


16  SELECTED   ARTICLES 

much  less,  does  not  appear  to  me  capable  of  being  decided 
with  the  degree  of  certainty  on  which  a  legislator  or  a  financier 
ought  to  act. 

Some,  indeed,  contend  that  the  rule  of  proportional  taxation 
bears  harder  upon  the  moderate  than  upon  the  large  incomes, 
because  the  same  proportional  payment  has  more  tendency  in  the 
former  case  than  in  the  latter,  to  reduce  the  payer  to  a  lower 
grade  of  social  rank.  The  fact  appears  to  me  more  than 
questionable.  But  even  admitting  it,  I  object  to  its  being  con- 
sidered incumbent  on  government  to  shape  its  course  by  such 
considerations,  or  to  recognize  the  notion  that  social  importance 
is  or  can  be  determined  by  amount  of  expenditure.  Govern- 
ment ought  to  set  an  example  of  rating  all  things  at  their  true 
value,  and  riches,  therefore,  at  the  worth,  for  comfort  or 
pleasure,  of  the  things  which  they  will  buy;  and  ought  not  to 
sanction  the  vulgarity  of  prizing  them  for  the  pitiful  vanity 
of  being  known  to  possess  them,  or  the  paltry  shame  of  being 
suspected  to  be  without  them,  the  presiding  motives  of  three- 
fourths  of  the  expenditure  of  the  middle  classes.  The  sacrifices 
of  real  comfort  or  indulgence  which  government  requires,  it  is 
bound  to  apportion  among  all  persons  with  as  much  equality  as 
possible ;  but  their  sacrifices  of  the  imaginary  dignity  dependent 
on  expense,  it  may  spare  itself  the  trouble  of  estimating. 

Both  in  England  and  on  the  Continent  a  graduated  property- 
tax  (1'impot  progressif)  has  been  advocated,  on  the  avowed 
ground  that  the  state  should  use  the  instrument  of  taxation  as 
a  means  of  mitigating  the  inequalities  of  wealth.  I  am  as 
desirous  as  any  one,  that  means  should  be  taken  to  diminish 
those  inequalities,  but  not  so  as  to  relieve  the  prodigal  at  the 
expense  of  the  prudent.  To  tax  the  larger  incomes  at  a 
higher  percentage  than  the  smaller,  is  to  lay  a  tax  on  industry 
and  economy;  to  impose  a  penalty  on  people  for  having  worked 
harder  and  saved  more  than  their  neighbors.  It  is  not  the 
fortunes  which  are  earned,  but  those  which  are  unearned,  that 
it  is  for  the  public  good  to  place  under  limitation.  A  just  and 
wise  legislation  would  abstain  from  holding  out  motives  for 
dissipating  rather  than  saving  the  earnings  of  honest  exertion. 
Its  impartiality  between  competitors  would  consist  in  endeavour- 
ing that  they  should  all  start  fair,  and  not  in  hanging  a  weight 
upon  the  swift  to  diminish  the  distance  between  them  and  the 
slow.  Many,  indeed,  fail  with  greater  efforts  than  those  with 


TAXATION  17 

which  others  succeed,  not  from  difference  of  merits,  but  differ- 
ence of  opportunities;  but  if  all  were  done  which  it  would  be 
in  the  power  of  a  good  government  to  do,  by  instruction  and  by 
legislation,  to  dimmish  this  inequality  of  opportunities,  the 
differences  of  fortune  arising  from  people's  own  earnings  could 
not  justly  give  umbrage.  With  respect  to  the  large  fortunes 
acquired  by  gift  or  inheritance,  the  power  of  bequeathing  is 
one  of  those  privileges  of  property  which  are  fit  subjects  for 
regulation  on  grounds  of  general  expediency;  and  I  have  already 
suggested,  as  the  most  eligible  mode  of  restraining  the  accumu- 
lation of  large  fortunes  in  the  hands  of  those  who  have  not 
earned  them  by  exertion,  a  limitation  of  the  amount  which  any 
one  person  should  be  permitted  to  acquire  by  gift,  bequest,  or 
inheritance.  Apart  from  this,  and  from  the  proposal  of  Ben- 
tham  (also  discussed  in  a  former  chapter)  that  collateral  inher- 
itance ab  intestato  should  cease,  and  the  property  escheat  to  the 
state,  I  conceive  that  inheritances  and  legacies,  exceeding  a 
certain  amount,  are  highly  proper  subjects  for  taxation;  and 
that  the  revenue  from  them  should  be  as  great  as  it  can  be 
made  without  giving  rise  to  evasions,  by  donation  inter  vivos  or 
concealment  of  property,  such  as  it  would  be  impossible 
adequately  to  check.  The  principle  of  graduation  (as  it  is  called) 
that  is,  of  levying  a  larger  percentage  on  a  larger  sum,  though 
its  application  to  general  taxation  would  be  in  my  opinion 
objectionable,  seems  to  me  both  just  and  expedient  as  applied 
to  legacy  and  inheritance  duties. 

The  objection  to  a  graduated  property  tax  applies  in  an 
aggravated  degree  to  the  proposition  of  an  exclusive  tax  on 
what  is  called  "realized  property,"  that  is,  property  not  forming 
a  part  of  any  capital  engaged  in  business,  or  rather  in  business 
under  the  superintendence  of  the  owner;  as  land,  the  public 
funds,  money  lent  on  mortgage,  and  shares  (I  presume)  in 
joint  stock  companies.  Except  the  proposal  of  applying  a 
sponge  to  the  national  debt,  no  such  palpable  violation  of  common 
honesty  has  found  sufficient  support  in  this  country,  during  the 
present  generation,  to  be  regarded  as  within  the  domain  of 
discussion.  It  has  not  the  palliation  of  a  graduated  property 
tax,  that  of  laying  the  burden  on  those  best  able  to  bear  it; 
for  "realized  property"  includes  the  far  larger  portion  of  the 
provision  made  for  those  who  are  unable  to  work,  and  consists, 
in  great  part,  of  extremely  small  fractions.  I  can  hardly  con- 


i8  SELECTED   ARTICLES 

ceive  a  more  shameless  pretension,  than  that  the  major  part 
of  the  property  of  the  country,  that  of  merchants,  manufacturers, 
farmers,  and  shopkeepers,  should  be  exempted  from  its  share 
of  taxation;  that  these  classes  should  only  begin  to  pay  their 
proportion  after  retiring  from  business,  and  if  they  never  retire 
should  be  excused  from  it  altogether.  But  even  this  does  not 
give  an  adequate  idea  of  the  injustice  of  the  proposition.  The 
burden  thus  exclusively  thrown  on  the  owners  of  the  smaller 
portion  of  the  wealth  of  the  community,  would  not  even  be  a 
burden  on  that  class  of  persons  in  perpetual  succession,  but 
would  fall  exclusively  on  those  who  happened  to  compose  it 
when  the  tax  was  laid.  As  land  and  those  particular  securities 
would  thenceforth  yield  a  smaller  net  income,  relatively  to 
the  general  interest  of  capital  and  to  the  profits  of  trade;  the 
balance  would  rectify  itself  by  a  permanent  depreciation  of 
those  kinds  of  property.  Future  buyers  would  acquire  land  and 
securities  at  a  reduction  of  price,  equivalent  to  the  peculiar  tax, 
which  tax  they  would,  therefore,  escape  from  paying;  while 
the  original  possessors  would  remain  burdened  with  it  even 
after  parting  with  the  property,  since  they  would  have  sold 
their  land  or  securities  at  a  loss  of  value  equivalent  to  the  fee- 
simple  of  the  tax.  Its  imposition  would  thus  be  tantamount  to 
the  confiscation  for  public  uses  of  a  percentage  of  their  property, 
equal  to  the  percentage  laid  on  their  income  by  the  tax.  That 
such  a  proposition  should  find  any  favour,  is  a  striking  instance 
of  the  want  of  conscience  in  matters  of  taxation,  resulting  from 
the  absence  of  any  fixed  principles  in  the  public  mind,  and  of 
any  indication  of  a  sense  of  justice  on  the  subject  in  the  general 
conduct  of  governments.  Should  the  scheme  ever  enlist  a  large 
party  in  its  support,  the  fact  would  indicate  a  laxity  of  pecuniarity 
integrity  in  national  affairs,  scarcely  inferior  to  American 
repudiation. 

PRINCIPLES  OF  TAXATION  1 

Adam  Smith  proposed  four  maxims,  or  principles,  "which," 
says  Mr.  Mill,  "having  been  generally  concurred  in  by  subsequent 
writers,  may  be  said  to  have  become  classical."  A  vast  deal 
of  importance  has  been  assigned  by  English  economists  to  these 
maxims.  They  have  been  quoted  over  and  over  again,  as  if 

'By  Francis  A.   Walker.     Political  Economy.     [1888].  p.   488-505. 


TAXATION  19 

they  contained  truths  of  great  moment;  yet  if  one  examines 
them,  he  finds  them,  at  the  best,  trivial;  while  the  first  and 
most  famous  of  these  can  not  be  subjected  to  the  slightest  test 
without  going  all  to  pieces. 

The  Social  Dividend  Theory  of  Taxation 

"The  subjects  of  every  state,"  says  Dr.  Smith,  "ought  to 
contribute  toward  the  support  of  the  government  as  nearly  as 
possible  in  proportion  to  their  respective  abilities;  that  is,  in 
proportion  to  the  revenue  which  they  respectively  enjoy  under 
the  protection  of  the  state." 

This  maxim,  though  it  sounds  fair,  will  not  bear  exami- 
nation. What  mean  those  last  words,  "under  the  protection 
of  the  state"?  They  are  either  irrelevant,  or  else  they  mean 
that  the  protection  enjoyed  affords  the  measure  of  the  duty 
to  contribute.  But  the  doctrine  that  the  members  of  the  com- 
munity ought  to  contribute  in  proportion  to  the  benefits  they 
derive  from  the  protection  of  the  state,  or  according  as  the 
services  performed  in  their  behalf  cost  less  or  cost  more  to  the 
state,  involves  the  grossest  practical  absurdities.  Those  who 
derive  the  greatest  benefit  from  the  protection  of  the  state  are 
the  poor  and  the  weak — women  and  children  and  the  aged ;  the 
infirm,  the  ignorant,  the  indigent. 

Even  as  among  the  well-to-do  and  wealthy  classes  of  the 
community,  does  the  protection  enjoyed  furnish  a  measure  of 
the  duty  to  contribute?  If  so,  the  richer  the  subject  or  citizen 
is,  the  less,  proportionally,  should  he  pay.  A  man  who  buys 
protection  in  large  quantities  should  get  it  at  wholesale  prices, 
like  the  man  who  buys  flour  and  meat  by  the  car-load.  More- 
over, it  costs  the  state  less  to  collect  a  given  amount  from 
one  taxpayer  than  from  many. 

Returning  to  the  maxim  of  Dr.  Smith,  I  ask,  does  it  put  for- 
ward ability  to  contribute,  or  protection  enjoyed,  as  affording 
the  true  basis  of  taxation?  Which?  If  both,  on  what  principles 
and  by  what  means  are  the  two  to  be  combined  in  practice? 

Taxation  According  to  Ability 

But  if  we  take  the  last  six  words  as  merely  a  half-conscious 
recognition  of  the  social-dividend  theory  of  taxation,  and  throw 
them  aside,  we  shall  still  find  this  much-quoted  maxim  far  from 
satisfactory:  "The  subjects  of  every  state  ought  to  contribute 
toward  the  support  of  the  government  as  nearly  as  possible  in 


20  SELECTED   ARTICLES 

proportion  to  their  respective  abilities;  that  is,  in  proportion  to 
the  revenue  which  they  respectively  enjoy." 

But  is  the  ability  of  two  persons  to  contribute  necessarily  in 
proportion  to  their  respective  revenues?  Take  the  case  of 
the  head  of  a  family  having  an  income  of  $500  a  year,  of  which 
$400  is  absolutely  essential  to  the  maintenance  of  himself  and 
wife  and  children  in  health  and  strength  to  labor.  Is  the 
ability  of  such  a  person,  who  has  only  $100  which  could  possi- 
bly be  taken  for  public  uses,  one-half  as  great  as  that  of  an- 
other head  of  a  family  similarly  situated  in  all  respects  except 
that  his  income  amounts  to  $1000,  and  who  has  therefore  $600 
which  could  conceivably  be  brought  under  contribution?  MaffP 
festly  not. 

We  shall,  then,  still  further  improve  Dr.  Smith's  maxim  if 
we  cut  away  all  after  the  first  clause:  "The  subjects  of  every 
state  ought  to  contribute  toward  the  support  of  the  government 
as  nearly  as  possible  in  proportion  to  their  respective  abilities." 
The  maxim  as  it  stands  is  unexceptionable,  but  does  not  shed 
much  light  on  the  difficult  question  of  assessment. 

The  Leave-them-as-you-find-them  Rule  of  Taxation 

The  best  statement  I  have  met  of  the  principle  of  contribution 
based  on  ability  is  contained  in  an  article  in  the  Edinburg  Re- 
view of  1883:  "No  tax  is  a  just  tax  unless  it  leaves  individuals 
in  the  same  relative  condition  in  which  it  finds  them."  What 
does  the  precept,  which  we  may  call  the  leave-them-as-you-find- 
them  rule  of  taxation,  demand?  In  seeking  an  answer  to  this 
question,  let  us  inquire,  historically,  what  bases  have  been  taken 
for  assessment.  Leaving  out  Rent-Bearing  Land,  whose  fiscal 
relations  have  been  sufficiently  dwelt  upon,  we  note  four: 

1.  Contribution  has  been  exacted  on  the  basis  of  Realized 
Wealth,  commonly  spoken  of  as  Capital. 

2.  On  the  basis  of  Annual  Income,  or  Revenue. 

3.  On  the  basis  of  Faculty,  or  native  and  acquired  power  of 
production. 

4.  On  the  basis  of  Expenditure,  or  the  individual  consump- 
tion of  wealth. 

These  are  the  four  historical  bases  of  taxation.  Let  us  see 
how  far  each  in  turn  answers  the  requirement  of  the  Edin- 
burgh Reviewer's  maxim  that  the  tax  ought  to  leave  the  mem- 
bers of  the  community  in  the  same  relative  condition  in  which 
it  finds  them. 


TAXATION  21 

And,  first,  of  Realized  Wealth.  Wealth  is  accumulated  by 
savings  out  of  revenue.  If,  then,  wealth  alone  is  to  be  taxed, 
it  is  saving,  not  production,  which  contributes  to  the  support 
of  the  state.  Economically  there  can  not  be  a  moment's  doubt 
that  for  government  thus  to  draw  its  revenue  from  only  that 
part  of  the  produced  wealth  of  the  community  which  is  reserved 
from  immediate  expenditure,  must  be  prejudicial.  The  question 
also  arises,  where  is  the  political  or  social  justice  of  such  a 
rule  of  contribution?  //  my  income  belongs  to  me,  to  spend 
for  my  own  comfort  and  gratification,  without  any  deduction 
for  the  uses  of  the  state,  why  should  I  lose  my  right  to  any 
part  of  it  because  I  save  it?  To  tax  realized  wealth  is  to 
punish  men  for  not  consuming  their  earnings  as  they  receive 
them.  Yet  it  is  eminently  for  the  public  interest  that  men 
should  save  of  their  means  to  increase  the  capital  of  the  country. 

Revenue  as  the  Basis  of  Taxation 

Turning  to  Revenue,  it  would  seem,  on  the  first  thought,  that 
we  had  reached  a  rule  of  equitable  contribution.  Yet  the  rule 
of  contribution  according  to  revenue  is  subject  to  grave  impeach- 
ment. 

Here  are  two  men  of  equal  natural  powers.  One  is  active, 
energetic,  industrious;  he  toils  early  and  late  and  realizes  a 
considerable  revenue,  on  a  portion  of  which  the  state  lays  its 
hand.  The  other  lets  his  natural  powers  run  to  waste ;  trifles 
with  life,  lounges,  hunts,  fishes,  gambles,  and  is  content  with 
a  bare  and  mean  subsistence.  Was  his  duty  to  contribute  to 
the  support  of  the  state  different  in  kind  or  degree  from  that 
of  the  other?  If  not,  how  has  his  idleness,  shiftlessness,  worth- 
lessness,  forfeited  the  state's  right  to  a  contribution  from  him  in 
proportion  to  his  abilities? 

We  must,  I  think,  conclude  that,  while  to  tax  wealth  instead 
of  revenue  is  to  put  a  premium  upon  self-indulgence  in  the 
expenditure  of  wealth  for  present  enjoyment,  to  tax  revenue 
instead  of  faculty  is  to  put  a  premium  upon  self-indulgence  in 
the  form  of  indolence,  the  waste  of  opportunities,  and  the  abuse 
of  natural  powers. 

Expenditure  as  the  Basis  of  Taxation 

Passing,  for  the  moment,  by  our  third  title,  we  find  that  the 
fourth  basis  taken  for  taxation  has  been  Expenditure.  This 


22  SELECTED   ARTICLES 

must  not  be  confounded  with  taxes  on  consumption,  as  con- 
stituting a  part  of  a  tax  system  in  which  taxes  on  realized 
wealth,  taxes  on  revenue,  taxes  on  faculty,  one  or  all  of  these, 
also  appear.  Nor  do  we  speak  here  of  taxes  on  expenditure 
imposed  in  practical  despair  of  an  equitable  distribution  of  the 
burdens  of  government.  We  are  now  concerned  with  expenditure 
only  as  the  single  basis  of  taxation,  in  the  interest  of  political 
equity. 

"It  is  generally  allowed,"  wrote  Sir  William  Petty,  two 
hundred  years  ago,  "that  men  should  contribute  to  the  public 
charge  but  according  to  the  share  and  interest  they  have  in  the 
public  peace;  that  is,  according  to  their  estate  or  riches. 

"Now,  there  are  two  sorts  of  riches,  one  actual  and  the 
other  potential.  A  man  is  actually  and  truly  rich  according 
to  what  he  eateth,  drinketh,  weareth,  or  in  any  other  way  really 
and  actually  enjoyeth.  Others  are  but  potentially  and  imagina- 
tively rich,  who,  though  they  have  power  over  much,  make 
little  use  of  it,  these  being  rather  stewards  and  exchangers  for 
the  other  sort  than  owners  for  themselves. 

"Concluding,  therefore,  that  every  man  ought  to  contribute 
according  to  what  he  taketh  to  himself  and  actually  enjoyeth, 
the  first  thing  to  be  done  is,"  etc.,  etc. 

Arthur  Young  seems  to  have  had  the  same  view.  After 
saying  that  every  individual  should  contribute  in  proportion 
to  his  ability,  he  added  in  a  note:  "By  ability  must  not  be 
understood  either  capital  or  income,  but  that  superlucration, 
as  Davenant  called  it,  which  melts  into  consumption." 

In  this  view,  so  far  as  any  one  possesses  wealth  in  forms 
available  for  the  future  production  of  wealth,  he  is  regarded 
as  a  trustee  or  guardian,  in  that  respect  and  to  that  extent,  of 
the  public  interests.  Just  this  is  said  by  Young— taxes  "can 
reach  with  propriety  the  expenses  of  his  living  only.  If  they 
touch  any  other  part  of  his  expenditure,  they  deprive  him  of 
those  tools  that  are  working  the  business  of  the  state" 

Fallacy  of  this  Doctrine 

I  do  not  see  but  that,  if  capital,  or  revenue  in  excess  of 
personal  expenditure,  is  to  be  exempted  from  taxation,  on  the 
plea  that  it  has  not  yet  become  the  subject  of  individual  and 
exclusive  appropriation,  and  is,  therefore,  presumably  held  and 
used  in  a  way  which  primarily  benefits  society,  the  state  has  the 


TAXATION  23 

right  to  inquire  whether  the  use  made  or  proposed  to  be  made 
of  wealth  is  such  as  will,  in  fact,  benefit  society,  and  benefit 
society,  moreover,  in  the  highest  degree  of  which  it  is  capable. 

The  citizen  says  to  the  state,  "You  must  not  tax  this  wealth 
because  I  have  not  yet  appropriated  it  exclusively  to  myself. 
Indeed,  I  am  going  to  use  it  for  the  benefit  of  society."  The 
state  rejoins:  "Yes,  but  of  that  we  must  satisfy  ourselves. 
We  must  be  the  judge  whether  your  use  of  your  wealth  will 
benefit  society.  Pay  your  taxes,  and  you  can  do  with  your 
wealth  as  you  like.  Claim  exemption  on  the  ground  of  public 
service,  and  you  rightfully  come  under  state  supervision  and 
control." 

The  fallacy  of  the  theory  we  are  considering  lies  in  the 
failure  to  recognize  the  fact  that  the  selfish  and  exclusive 
appropriation  and  enjoyment  of  wealth  are  inseparable  from 
its  possession.  The  pride  of  ownership,  the  social  distinction 
which  attends  great  possessions,  the  power  which  wealth  con- 
fers, are  additional  to  the  merely  sensual  enjoyment  to  be 
derived  from  personal  expenditure.  Would  I  resent  the  inter- 
ference of  the  government,  or  of  my  neighbors,  in  the  manage- 
ment of  my  property,  upon  the  ground  that  it  was  not  being 
used  in  the  best  way?  What  is  that  resentment  but  the  proof 
of  a  personal  appropriation,  an  exclusive  appropriation,  of  that 
wealth?  My  resentment  would  spring  out  of  the  deeply  seated 
feeling  that  my  management  of  my  own  property  is  my  right: 
and  that  he  who  should  deprive  me  of  it  would  take  from  me 
what  is  as  truly  mine  as  the  right  to  eat,  drink,  wear,  or  other- 
wise consume  and  enjoy  any  portion  of  it;  that,  short  of  absolute 
mental  incapacity,  it  is  my  prerogative  to  control  my  own  estate, 
even  though  not  to  the  highest  advantage  of  the  community,  or 
even  of  myself :  though  not  wisely  or  well.  In  other  words,  I 
am  not  a  trustee,  but  a  proprietor. 

Dangerous  Nature  of  This  Doctrine 

This  doctrine  of  the  Trusteeship  of  Capital  is  not  more 
irrational  than  it  is  socially  dangerous.  It  is  held  by  men  who 
are  fierce  in  denouncing  graded  taxation  as  confiscation ;  yet  it 
is,  in  its  very  essence,  communistic.  If  the  owner  of  wealth 
is  but  a  trustee;  if  "his  tools  are  working  the  business  of  the 
state,"  then  the  real  beneficiary  may  enter  and  dispossess  the 
trustee  if  any  substantial  reason  for  dissatisfaction  as  to  the 


24  SELECTED   ARTICLES 

management   of   the   property   exists;    the   state   may   take   the 
tools  into  its  own  hands  and  "work  its  business"  for  itself. 

Faculty  as  the  Basis  of  Taxation 

I  reach,  then,  the  conclusion  that  Faculty,  the  power  of 
production,  constitutes  the  only  theoretically  just  basis  of  con- 
tribution; that  men  are  bound  to  serve  the  state  in  the  degree 
in  which  they  have  the  ability  to  serve  themselves. 

I  think  we  shall  more  clearly  see  Faculty  to  be  the  true 
natural  basis  of  taxation  if  we  contemplate  a  primitive  com- 
munity, where  occupations  are  few,  industries  simple,  realized 
wealth  at  a  minimum,  the  members  of  the  society  nearly  on  a 
level,  the  wants  of  the  state  limited.  Suppose,  now,  a  work 
of  general  concern,  perhaps  of  vital  importance,  requires  to  be 
constructed :  a  dyke  against  inundation,  or  a  road,  with  occasional 
bridges,  for  communication  with  neighboring  settlements.  What 
would  be  the  rule  of  contribution?  Why,  that  all  able-bodied 
persons  should  turn  out  and  each  man  work  according  to  his 
faculties,  in  the  exact  way  in  which  he  could  be  most  useful. 

In  regard  to  a  community  thus  for  the  time  engaged,  we 
note  two  things :  first,  no  man  would  be  held  to  be  exempt 
because  he  took  no  interest  in  the  work;  he  would  not  be 
allowed  to  escape  contribution  because  he  was  willing  to  relin- 
quish his  share  of  the  benefits  to  be  derived,  preferring  to  get 
a  miserable  subsistence  for  himself  by  hunting  or  fishing; 
second,  between  those  working,  a  higher  order  of  faculties, 
greater  muscular  power,  or  superior  skill  would  make  no  dis- 
tinction as  to  the  time  for  which  the  individuals  of  the  com- 
munity should  severally  remain  at  work. 

The  Ideal  Tax 

This  is  the  ideal  tax.  It  is  the  form  of  contribution  to  which 
all  primitive  communities  instinctively  resort.  It  is  the  tax  which 
but  for  purely  practical  difficulties,  would  afford  a  perfectly 
satisfactory  measure  of  the  obligation  of  every  citizen  to  con- 
tribute to  the  sustentation  and  defense  of  the  state.  Any  mode 
of  taxation  which  departs  in  essence  from  this  involves  a  greater 
or  smaller  sacrifice  of  the  equities  of  contribution;  and  any 
mode  of  taxation  which  departs  from  this  in  form  is  almost 
certain  to  involve  a  greater  or  smaller  departure  in  essence. 

And  it  deserves  to  be  noted  that  the  largest  tax  of  modern 


TAXATION  25 

times,  even  in  the  most  highly  organized  societies  of  Europe, 
the  obligation  of  compulsory  military  service,  is  assessed  and 
collected  on  precisely  this  principle. 

Faculty  Tax  Impracticable 

But  while  the  tax  on  Faculty  is  the  ideal  tax,  it  has  usually 
been  deemed  impracticable,  as  the  sole  tax,  in  a  complicated 
condition  of  industrial  society.  As  occupations  multiply  and 
the  forms  of  production  become  diversified,  the  state  can  not  to 
advantage  call  upon  each  member,  by  turns,  to  serve  in  person 
for  a  definite  portion  of  each  day  or  of  the  year.  Hence  modern 
statesmanship  has  invented  taxes  on  expenditure,  on  revenue, 
on  capital,  not  as  theoretically  just,  but  with  a  view  to  reduce 
the  aggregate  burden  on  the  community,  and  to  save  production 
and  trade  from  vexation  and  obstruction. 

We  recur  to  the  Tax  on  Revenue 

The  politicians  of  the  existing  [1888]  order,  as  we  have  seen, 
shrink  from  the  effort  involved  in  levying  the  public  contribu- 
tions entirely,  or  even  chiefly,  according  to  faculty.  Next  in 
point  of  political  equity  comes  the  tax  on  incomes,  or  the  revenues 
of  individuals.  That  tax,  as  we  now  contemplate  it,  is  a  tax 
on  the  revenues  of  all  classes,  with  exception  only  of  the  amount 
requisite  for  the  maintenance  of  the  laborer  and  his  family,  after 
the  simplest  possible  manner,  in  health  and  strength  to  labor. 
It  is  not  a  compensatory  tax,  constituting  a  part  of  a  system  in 
which  realized  wealth  and  various  forms  of  expenditure  are 
also  brought  under  contribution,  but  the  sole  tax  imposed  by 
the  state. 

Exemption  of  the  Actual  Necessaries  of  Life 

It  has  been  said  that  from  such  an  income  tax  the  necessary 
cost  of  subsistence  must  be  exempted.  Mr.  D.  A.  Wells  has, 
indeed,  laid  down  two  propositions:  first,  that  "any  income 
tax  which  permits  of  any  exemption  whatever  is  a  graduated 
income  tax;"  and  second,  that  "a  graduated  income  tax  to 
the  extent  of  its  discrimination  is  an  act  of  confiscation."  But 
the  exemption  of  a  certain  minimum  annual  revenue  is  a  matter 
of  sheer  necessity,  whether  the  state  will  or  no.  Economically 
speaking,  it  is  not  possible  to  tax  an  income  of  this  class.  A 
man  in  the  receipt  of  such  an  income  cannot  contribute  to  the 


26  SELECTED   ARTICLES 

expenses  of  government.  Should  the  state,  with  one  hand,  take 
any  thing  from  such  a  person  as  a  taxpayer,  it  must,  with  the 
other,  give  it  back  to  him  as  a  pauper. 


THE  PRINCIPLE  OF  APPORTIONMENT1 

The  question  of  apportionment  of  taxes  leads  to  a  con- 
sideration of  the  relative  duty  of  citizens  to  pay  for  the  sup- 
port of  the  state.  The  student  is  not  left  entirely  to  speculation 
respecting  this  subject.  As  has  been  already  pointed  out,  it 
lies  in  the  nature  of  a  tax,  and  of  the  political  conditions  in 
which  taxation  presents  itself  as  an  important  public  problem, 
that  payments  for  support  of  the  state  should  be  equitable  as 
between  citizens.  The  principle  of  apportionment,  therefore, 
according  to  which  this  duty  is  assigned,  must  recognize  all 
those  complex  relationships  which  modern  philosophy  finds  in 
the  phrase  political  equity. 

Special  Reasons  for  Equitable  Apportionment 

No  argument  is  needed  to  enforce  the  conviction  that  taxes 
should  be  apportioned  on  the  basis  of  equity,  but  a  few  words 
may  be  added  to  render  yet  clearer  the  nature  of  this  necessity. 
The  power  to  tax  is  a  sovereign  power,  and  its  exercise  should 
be  equitable  for  the  same  reason  that  every  act  of  government 
should  conform  to  what  is  fair  and  just.2  Now  that  the  personal 
sovereign  is  no  longer  a  menace  to  the  rights  of  the  people,  the 
importance  of  relative  justice  as  between  citizens  is  the  strongest 
apology  for  popular  government.  This  demand  for  equity, 
therefore,  finds  its  ultimate  sanction  in  the  structure  of  the 
state  itself,  and  when  used  in  connection  with  taxation  it  is 
merely  an  application  to  a  specific  case  of  a  fundamental  concep- 
tion respecting  popular  government. 

It  is  possible,  however,  to  discover  a  more  commonplace 
reason  for  an  equitable  distribution  of  payments.  Taxes  are 
frequently  spoken  of  as  burdens,  and  there  is  no  objection  to 
such  a  use  of  language,  provided  the  phrase  is  employed  in 
the  same  sense  as  when  speaking  of  any  of  the  necessary  items 
of  expenditure  in  the  domestic  budget.  If  the  payment  of  a 

*  By  Henry  C.  Adams.     The  Science  of  Finance,    p.   321-32. 
2  The  student  of  course  recognizes  this  as  coming  from  Mill. 


TAXATION  27 

coal  bill  or  the  quarter's  rent  be  a  burden,  then  is  the  payment 
of  a  tax  a  burden.  Using  the  phrase  in  this  sense  it  is  clear 
that  the  payment  of  any  definite  amount,  the  various  expect- 
ations from  life  due  to  a  customary  standard  of  living  being 
for  the  moment  dropped  from  view,  is  felt  to  be  a  burden  in 
proportion  to  the  size  of  the  fund  from  which  it  is  made.  The 
burden  of  a  payment  is  measured  by  what  is  left  after  the 
payment,  rather  than  by  the  amount  paid.  It  is  the  surplus 
over  the  necessary  expenditures  of  life  which  minister  to  the 
developing,  and  therefore  the  most  keenly  sensitive,  wants. 
This  is  the  explanation  of  the  universal  opinion  that  where 
fortunes  vary  equal  payments  would  not  be  equitable  as  between 
citizens ;  and  the  commonplace  argument  for  equity  in  matters 
of  taxation,  to  which  reference  was  made,  rests  upon  the  assump- 
tion that  the  relief  to  him  who  fails  to  pay  his  just  share  is 
not  as  great  as  the  burden  which  this  relief  imposes  on  some 
other  member  of  the  community  who  on  this  account  pays 
more.  Equity  in  the  apportionment  of  taxes,  therefore,  reduces 
the  burden  for  the  support  of  the  State  to  its  minimum,  just 
as  a  scientific  adjustment  of  straps  and  buckles  by  which  a  knap- 
sack is  slung  to  a  soldier's  back  makes  the  load  carried  as  though 
it  were  light.1  It  thus  appears  that  a  just  system  of  taxation 
is  equivalent  to  economy  of  social  energy,  from  which  it  fol- 
lows that  the  principle  according  to  which  taxes  are  appor- 
tioned may  have  a  very  direct  bearing  upon  the  rate  of  social 
development. 

The  above  thought  may  be  pressed  yet  a  step  further  by 
showing  more  specifically  how  equity  in  the  levy  of  taxes  bears 
upon  the  development  of  a  nation's  industries.  A  payment 
of  any  sort  works  its  way  into  industrial  conduct  through  the 
incentives  to  industry  resulting  from  the  satisfaction  which 
follows  the  payment  in  question.  The  labour  which  will  be 
undertaken  in  the  future  depends  in  large  measure  upon  the 
degree  of  satisfaction  resulting  from  the  labour  of  the  past. 
This,  tempered,  perhaps,  by  the  instinctive  hopefulness  of 
mankind,  is  the  fundamental  law  of  industrial  conduct.  Is 
it  not,  then,  clear  that  an  inequitable  apportionment  of  taxes, 
which  deprives  him  who  pays  too  much  of  more  satisfaction 
in  the  expenditure  of  his  income  than  it  adds  to  that  of  him 
who  pays  too  little,  results  in  weakening  the  aggregate  of 

1  A  common  simile  of  German  writers. 


28  SELECTED   ARTICLES 

the  motives  to  industrial  activity?  Thus  the  universal  ex- 
perience of  nations,  that  one  of  the  surest  ways  to  encourage 
industry  is  to  adjust  the  fiscal  system  to  the  demands  of  equity 
as  between  citizens,  finds  upon  analysis  a  psychological  basis. 

There  are,  then,  three  reasons  why  equity  should  control 
apportionment.  It  is  demanded  by  the  accepted  governmental 
principles  of  free  states;  it  is  essential  to  the  economy  of  social 
energy;  and  it  is  important  as  a  means  of  presenting  motives 
to  industry  in  the  most  effective  manner. 

Analysis  of  the  Rules  of  Apportionment 

It  is  one  thing  to  conclude  that  equity  should  give  character 
to  apportionment;  it  is  quite  another  to  discover  an  intelligent 
and  at  the  same  a  workable  rule  for  the  attainment  of  this  end. 
Some  progress  in  this  direction  was  made  when  considering  the 
theorist's  definition  of  a  tax,  since  it  was  there  shown  that  a 
tax  could  be  considered  neither  as  the  price  charged  for  public 
service  nor  as  an  equivalent  paid  for  value  received.  On  the 
other  hand,  it  was  concluded  that  a  tax  is  a  contribution  to  a 
common  fund  designed  for  a  common  end.  Manifestly,  the 
principle  of  apportionment  adopted  will  ally  itself  to  the  accepted 
conception  of  a  tax;  and  we  might,  therefore,  in  strict  logic, 
proceed  at  once  to  inquire  what  theory  of  apportionment  is 
bound  up  in  the  statement  that  a  tax  is  a  contribution.  This, 
however,  would  exclude  certain  considerations  capable  of  throw- 
ing considerable  light  upon  a  difficult  problem.  It  would  also 
result  in  an  opinion  arrived  at  from  theory  alone,  ignoring 
those  practical  considerations  which  so  largely  control  in  matters 
of  finance,  and  which  do  not  present  themselves  until  one  begins 
to  trace  the  consequences  that  follow  the  application  of  the  prin- 
ciples adopted. 

Apportionment  and  the  Cost  Theory  of  Taxation 

A  moment's  consideration  is  adequate  to  show  that  the  duty 
to  pay  for  the  support  of  the  state  cannot  be  assigned  to  citizens 
according  to  the  cost  to  government  of  the  service  rendered. 
The  fact  that  this  cost  cannot  be  specialized  is  of  itself  final 
against  such  a  rule.  Protection,  for  example,  consists  in  creating 
and  maintaining  a  condition  of  security  in  society,  and  its  cost 
cannot  be  divided  up  and  parcelled  out.  The  law  undertakes 
to  arrest  and  punish  every  criminal,  no  matter  what  the  cost 


TAXATION  29 

may  be,  neither  as  an  act  of  retribution  nor  to  enable  him  who 
suffered  the  wrong  to  enjoy  revenge,  but  because  every  mis- 
carriage of  the  law  tends  to  destroy  the  conditions  under  which 
life  is  secure.  "The  value  of  government  to  any  man  is  pro- 
portioned to  the  completeness  of  the  protection  it  extends  to  all 
men.  If  it  undertook  to  protect  only  those  who  contribute  to 
its  cost,  it  would  thereby  breed  lawlessness  and  invite  anarchy."  * 

The  error  underlying  the  rule  that  taxes  should  be  appor- 
tioned to  cost  is  further  shown  by  applying  it  to  the  protection 
of  property.  All  property  is  not  of  the  same  sort  in  that  its 
protection  does  not  occasion  the  same  expenditure.  More 
litigation,  for  example,  arises  respecting  property  that  exists 
in  the  form  of  a  patent  privilege,  a  franchise,  or  any  sort  of  a 
grant  whatever,  than  is  the  case  respecting  property  open  for 
investment  to  all  who  possess  free  capital.  The  state  could 
not,  however,  on  this  account  impose  heavier  burdens  upon  it 
than  upon  ordinary  property.  A  better  illustration  may  be  given : 
security  of  property  depends  in  large  measure  upon  the  enlight- 
ened self-interest  and  moral  sense  of  the  community  in  which  it 
exists.  Where  the  grade  of  intelligence  is  low  the  cost  of 
protection  is  high;  where  the  grade  of  intelligence  is  high  the 
cost  of  protection  is  low;  but,  provided  two  such  communities 
have  intercourse  with  each  other,  it  is  of  as  much  importance  to 
the  community  where  property  is  secure  that  property  be  pro- 
tected in  the  community  where  it  is  exposed  to  danger,  as  that 
its  own  property  should  be  guarded.  Here,  again,  as  in  the 
case  of  protection  to  life  and  limb,  the  end  of  government  is 
to  maintain  a  condition  of  security,  and  it  is  easy  to  see  that 
the  protection  of  property  on  the  borderland  of  attack  is  essen- 
tial to  the  security  of  that  which  on  account  of  its  situation 
is  relatively  less  exposed.  The  rule  of  apportioning  taxes 
according  to  cost  is  not  capable  of  realization. 

Moreover,  the  theory  on  which  it  rests  fails  to  harmonize 
with  one's  ideas  of  equity  and  justice  as  between  different 
classes  of  property  differently  located.  It  is  not  fair  that 
property  which  already  carries  a  burden  on  account  of  the  fact 
that  from  its  nature  or  condition  it  is  insecure  should  be 
imposed  with  unusual  taxes,  when  its  protection  is  essential  to 
the  security  of  all  property  in  the  community.  To  apply  the 

1  By  Cooley.  Principles  That  Should  Govern  in  the  Framing  of  Tax 
Laws.  p.  5. 


30  SELECTED   ARTICLES 

principle  of  cost  in  the  levy  of  taxes  would  be  to  call  for  heavy 
payments  from  the  weak  in  order  to  render  small  the  payments 
from  the  strong;  and  since  the  payment  is  a  coerced  and  not  a 
voluntary  payment,  such  an  assignment  of  the  duty  to  support 
the  state  cannot  be  regarded  as  equitable  employment  of  public 
authority. 

No  government,  so  far  as  the  writer  is  aware,  undertakes 
to  apply  strictly  the  rule  of  apportionment  now  under  con- 
sideration. But  there  are  many  instances  in  which  the  prin- 
ciple of  cost  is  permitted  to  shape  in  a  very  marked  degree 
financial  policy.  Indeed,  a  survey  of  the  taxing  system  of 
modern  states  offer  some  warrant  for  the  generalization  that 
according  as  a  people  has  emerged  from  feudalism  at  a  remote 
or  recent  date,  so  will  be  the  extent  to  which  taxes  are  appor- 
tioned on  the  basis  of  cost.  In  England  at  least,  where  feudalism 
was  abandoned  in  the  sixteenth  century,  very  little  is  known 
of  the  specialization  of  public  services ;  while  German  peoples, 
from  whose  administrative  regime  the  influence  of  feudalism 
has  not  yet  passed  away,  consciously  recognize  the  rule  that 
payment  for  the  support  of  the  state  should  be  adjusted  to  cost. 
The  classifications  of  service  which  permits  the  theory  of 
specialization  to  be  realized  are  both  interesting  and  instructive. 
The  one  here  given  is  taken  from  the  Austrian  writer,  von  Hock. 
According  to  von  Hock  the  services  of  the  state  are  regarded  as 
embraced  under  three  classes,  as  follows : 

First.  Every  one  who  acknowledges  himself  as  a  loyal  sub- 
ject of  the  government  enjoys  from  the  state  protection  of 
person,  the  care  of  the  state  for  safety,  and  for  the  preserva- 
tion of  general  order,  for  cleanliness,  and  freedom  from 
disease;  he  enjoys  also  the  dignity  and  sense  of  importance 
which  comes  with  the  strength  and  reputation  of  a  nation, 
and  avails  himself  also  of  the  privilege  of  carrying  on  an 
industry,  trade,  or  profession  within  the  state  which  would 
not  be  possible  except  the  state  exists.  These  and  other  like 
services  are  personal  and  direct.  They  are  rendered  to  rich 
and  poor  alike,  and  should  on  this  account  be  made  the  basis 
of  the  personal  tax. 

Second.  Whoever  has  possessions  in  a  state  and  invests 
his  property  in  an  industrial  calling  enjoys  the  protection  of 
the  state  for  his  property  and  his  industry;  the  courts  enforce 
legitimate  contracts  and  guard  him  against  all  fraudulent 


TAXATION  31 

procedures;  he  enjoys  the  advance  in  the  value  of  property  that 
accrues  on  account  of  the  growth  of  society;  or,  without  further 
specification,  reducing  all  these  services  to  a  common  basis,  each 
citizen  enjoys  a  given  income  under  the  protection  of  the  state 
and  in  part  because  the  state  exists.  This  class  of  services  is 
made  the  basis  of  the  income  or  property  tax. 

Third.  In  addition  to  the  above  there  are  a  large  number 
of  special  and  peculiar  services  which  the  state  renders  to 
individuals.  Public  education,  the  building  of  highways,  the 
transmission  of  news,  the  conferring  of  honours,  the  recording 
of  mortgages,  and  the  like,  are  illustrations  of  the  services  in 
question.  Being  special  in  their  character,  they  should,  according 
to  the  purchase  theory  of  taxation,  be  made  the  basis  of  a  special 
payment.  * 

Should  one  insist  on  preceding  from  the  quid  pro  quo 
theory  of  taxation  he  probably  could  not  find  a  better  classi- 
fication of  public  services  for  that  purpose ;  a  good  classification, 
however,  does  not  set  aside  the  errors  in  theory  or  the  diffi- 
culties in  administration  incident  to  this  conception  of  taxation. 

Apportionment  and  the  Benefit  Theory  of  Taxation 

It  has  also  been  the  claim  of  many  writers  that  taxes  should 
be  apportioned  on  the  basis  of  the  value  of  services  to  citizens. 
This  is  the  principle  of  apportionment  corresponding  to  the 
benefit  theory  of  a  tax.  Among  the  practical  results  of  an 
attempt  to  apply  the  value  theory  of  apportionment  would 
be  the  imposition  of  excessive  taxes  upon  those  who  are  least 
able  to  support  them.  It  is  undoubtedly  true  that  the  guar- 
dianship of  a  just  government  is  appreciated  most  intensely 
by  those  who  are  least  capable  of  protecting  themselves.  As 
stated  by  President  Walker,  "those  who  derive  the  greatest 
benefit  from  the  protection  of  the  State  are  the  poor  and  the 
weak — women  and  children,  and  the  aged ;  the  infirm,  the 
ignorant,  the  indigent."2  Not  only  is  this  true  of  the  original 
and  fundamental  functions  of  government,  that  is  to  say,  the 
protection  of  life  and  property,  but  it  is  equally  true,  indeed 
in  a  more  marked  degree  true,  of  the  higher  activities  of  later 
appearance,  such  as  education,  recreation,  guardianship  against 
the  deteriorating  influence  of  unregulated  competition,  and  the 

1  Die    oeffentlichen  Abgaben   und   Schulden.   p.    15-16. 

2  Political   Economy,    p.  490. 


32  SELECTED  ARTICLES 

like.  It  thus  becomes  clear  that  to  apply  the  principle  that  taxes 
should  be  paid  in  proportion  to  the  value  of  service  would  de- 
stroy the  conditions  which  alone  justified  the  state  in  undertaking 
the  service  in  the  first  place.  If  taxes  for  the  support  of  schools, 
for  example,  should  be  levied  to  citizens  in  proportion  to 
the  value  to  them  respectively  of  the  public-school  system,  as 
estimated  by  citizens  of  varying  incomes,  no  sound  reason  could 
be  urged  why  the  state  should  undertake  to  provide  public 
schools  at  all.  It  is  because  the  education  which  the  rich  will 
naturally  provide  for  their  children  may,  with  a  very  slight 
addition  to  the  cost,  be  made  the  common  possession  of  all 
classes  that  the  state  assumes  the  support  of  schools.  It  may 
be  urged  that  the  poor  should  pay  for  the  increment  of  cost 
arising  from  the  extension  of  facilities  for  instruction;  but  to 
call  upon  them  for  payment  in  proportion  to  their  estimate  of 
the  value  to  them  of  a  system  of  free  schools  is  a  reductio  ad 
absurdum.  It  would  cause  the  schools  to  disappear,  yet  this 
is  what  the  benefit  theory  of  taxation  logically  applied  would 
lead  to. 

The  theory  of  apportionment  now  claiming  attention  will 
be  recognized  as  unsound  if,  in  addition  to  noting  its  practical 
results,  one  observes  that  it  calls  for  an  estimate  of  what  is 
beyond  estimate  or  for  which  there  is  no  comparative  basis  of 
estimate.  Government  is  essential  to  civilized  existence  and 
there  is,  therefore,  no  basis  for  calculating  the  value  of  the 
services  which  it  renders.  "If  government,"  says  Judge  Cooley, 
"were  something  to  be  taken  up  or  dispensed  with  at  the  option 
of  individuals,  that  method  of  estimation  would  take  on  a 
different  appearance;  but  when  the  existence  of  a  government 
in  some  form  is  confessedly  something  always  to  be  assumed, 
it  is  clear  that  there  can  be  no  basis  for  an  estimate  of  its  value 
as  compared  with  that  condition  of  things  in  which  there  should 
be  no  government  at  all.  It  is  true  that  if  a  theory  valuable  for 
practical  application  can  be  deduced  from  any  imaginary  state 
of  things,  there  is  no  reason  in  the  baselessness  of  the  assumed 
facts  to  preclude  our  availing  ourselves  of  it.  The  theory  that 
government  is  founded  in  contract  may  answer  a  good  purpose, 
though  historically  it  is  baseless.  But  so  long  as  it  is  impossible 
to  estimate  the  relative  value  of  government  to  person  and 
property,  and  impossible  to  collect  taxes  according  to  it  if  the 
estimate  were  practicable,  it  is  manifest  that  any  theory  of 


TAXATION  33 

taxation  drawn  from  an  impossible  comparison  of  a  state  of 
society  under  settled  government  with  an  imaginary  state  of 
things  when  no  government  exists  must  be  absolutely  without 
practical  value."  x 

Apportionment  and  the  Contributory  Theory  of  Taxation 

It  is  hoped  that  the  foregoing  considerations  have  served  to 
impress  upon  the  reader  the  conception  of  solidarity  in  modern 
society,  and  of  common  interests  which  do  not  admit  of  segrega- 
tion either  as  a  cost  to  the  government  or  a  value  to  the  citizen ; 
for  it  is  under  the  influence  of  this  conception  that  the  true 
theory  of  apportionment  must  be  developed.  A  tax  is  a  contribu- 
tion from  private  funds  to  the  public  purse,  and  the  principle 
according  to  which  the  government  should  determine  for  each 
the  amount  of  his  contribution  is  found  in  the  expression  that 
each  citizen  should  pay  for  the  support  of  the  state  in  proportion 
to  his  ability  as  compared  with  the  ability  of  others. 

Should  one  ask  why  ability  is  accepted  as  the  basis  of 
apportionment,  perhaps  the  most  satisfactory  reply  would  be 
that  it  approves  itself  to  the  moral  sense  of  men  in  all  cases 
where  common  expenditures  are  met  by  means  of  contributions. 
A  church,  for  example,  in  which  the  sense  of  duty  in  the  matter 
of  payments  is  more  highly  developed  than  in  any  other  voluntary 
association  holds  it  as  a  common  law  of  religious  sentiment 
that  the  rich  member  should  pay  more  for  common  ends  than 
the  poor  member;  and  the  measure  of  his  greater  payment  is  his 
ability,  all  things  considered,  to  bear  the  payment.  This  is  the 
New  Testament  doctrine  of  service,  and  its  acceptance  as  a 
canon  of  taxation  shows  that  the  modern  science  of  finance 
recognizes  one  of  the  fundamental  principles  of  Christian  ethics. 
Not  alone  in  the  church  is  this  rule  of  service  recognized,  but 
in  all  voluntary  associations,  whether  temporary  or  permanent, 
it  is  admitted  as  a  principle  of  action,  provided  only  the  asso- 
ciation acknowledges  a  solidarity  in  the  interests  of  its  mem- 
bers. 2  It  may,  then,  be  asserted  without  further  comment  that 

1  By   Cooley.     Principles   that    should   Govern   in    the   Framing   of   Tax 
Laws.  p.  4. 

2  A    club    with    annual    fees    does    not    commonly    realize    solidarity    of 
interest.      Should    this    however    be    the    case    in    some    particular    instance, 
a    club  would   still    have   no    need   to    recognize    ability   of   members   in    se- 
curing   means    for    pecuniary    support,    since    its    members    are    all    of    the 
same    class    and    consequently   equal   payment    for    club    expenses    becomes 
equitable   payment    as   between   club    members. 


34  SELECTED   ARTICLES 

the  rule  of  apportionment  which  calls  for  the  levy  of  taxes 
according  to  the  ability  of  citizens  to  pay  finds  its  sanction  in 
the  moral  sense  of  the  community,  and  this  in  all  matters  of 
social  rights  and  social  duties  must  be  accepted  as  final. 

The  inquiry  may  perhaps  be  raised,  in  view  of  the  fact 
that  the  contributory  theory  of  a  tax  was  not  granted  approval 
until  comparatively  recent  times,  whether  modern  peoples  are 
influenced  by  finer  conceptions  of  justice  and  equity  than  was  the 
case  in  the  past.  This  may  possibly  be  true,  but  the  acceptance 
of  the  principle  that  taxes  should  be  levied  according  to  ability, 
in  place  of  the  "cost"  or  the  "benefit"  theory  of  apportionment, 
does  not  prove  it  to  be  true ;  inasmuch  as  a  consideration  of  the 
social  and  industrial  conditions  under  which  these  abandoned 
theories  were  held  will  show  that  they  were  capable  at  the  time 
of  securing  substantial  justice  as  between  citizens. 

Consider,  for  example,  the  rule  upon  which  the  colonial 
taxation  of  Massachusetts  rested.  "Every  man's  life,"  it  was 
asserted,  "is  equally  dear  to  him,  and  every  man  should  pay 
equally  for  its  protection;  every  man's  property  is  equally  dear 
to  him,  and  every  man  should  pay  for  its  protection  in  propor- 
tion to  its  amount."  The  society  which  this  rule  held  in  view 
was  early  New  England  society,  and  the  time  the  last  part 
of  the  last  century.  There  was  at  this  time  a  rough  equality  in 
respect  to  property  as  well  as  social  status,  and  on  this  account 
the  principle  of  apportionment  to  which  Massachusetts  states- 
men gave  their  approval  would  lead  to  payment  for  the  support 
of  the  State  in  proportion  to  ability.  The  same  rule  applied  at 
the  present  time  would  not  result  in  adjusting  the  burden  of 
taxation  in  proportion  to  the  relative  ability  of  citizens.  It  is 
the  new  social  and  industrial  conditions  which  make  it  necessary 
to  abandon  the  "cost"  and  the  "value"  theories  of  apportionment, 
and  not  the  development  of  a  finer  sense  of  justice  among  men. 
It  is  true  that  a  higher  phase  of  social  ethics  is  in  process  of 
evolution,  and  that  the  necessity  of  giving  expression  to  the 
contributory  theory  of  taxation  is  one  of  the  results  of  that 
evolution,  but  to  claim  that  payment  for  the  support  of  the 
state  in  proportion  to  ability  is  a  newly  developed  moral  concept 
would  be  to  cast  suspicion  upon  the  rule  of  apportionment 
for  which  we  are  now  contending.  It  is  much  more  convincing 
to  say— what,  indeed,  is  true— that  the  equity  of  the  rule  that 
taxes  should  be  paid  in  proportion  to  ability  has  been  universally 


TAXATION  35 

approved  by  the  moral  sense  of  mankind,  but  that  never  until 
recently  has  there  been  any  need  for  the  formal  expression  of 
the  rule  as  the  basis  of  apportionment.  It  is  the  complex 
character  of  modern  industry,  its  stratification  along  the  line 
of  property  rights,  and  the  great  disparity  of  riches,  which 
brings  into  prominence  the  principle  that  taxes  should  be  paid 
according  to  ability.  Not  only,  therefore,  does  this  theory  of 
apportionment  rest  upon  the  moral  sense  of  the  community  as 
it  now  exists,  but  it  appeals  for  support  to  the  conscience  of  the 
past.  The  first  struggle  which  arose  respecting  taxation  was  to 
establish  the  rule  that  all  men  should  pay  something ;  the  question 
of  the  present  is  to  devise  a  system  by  which  men  may  be  made 
to  pay  according  to  their  abilities. 

One  further  thought  may  be  expressed  with  regard  to  the 
principle  of  apportionment  now  under  consideration.  It  finds 
an  added  sanction  in  the  fact  that  it  is  the  complement  of  the 
theory  of  distribution  which  both  individualistic  and  socialistic 
economic  philosophy  recognizes  as  just  and  equitable.  Commun- 
ists assert  that  product  should  be  distributed  according  to  need ; 
all  other  schools  of  writers  claim  that  product  should  be  dis- 
tributed according  to  efficiency.  If,  now,  the  product  of  the 
industrial  organization  is  to  be  distributed  according  to  efficiency, 
what  is  more  natural  than  that  the  payment  for  the  support  of 
the  state,  which  alone  renders  industrial  association  possible, 
should  be  made  according  to  ability?  The  financial  principle 
of  apportionment  according  to  ability  is  thus  observed  to  be 
the  counterpart  of  the  economic  principle  of  distribution  accord- 
ing to  efficiency.  Whether  or  not  the  financial  principle  would 
fall  were  the  economic  principle  to  be  abandoned  need  not  here 
be  discussed ;  it  is  sufficient  to  notice  the  close  connection  which 
exists  between  the  principle  of  public  and  of  private  economy, 
and  to  recognize  that  each  receives  a  presumption  in  its  favour 
from  the  acceptance  of  the  other. 

It  is  believed  that  the  above  considerations  warrant  the 
conclusion  that  equity  in  taxation  means  the  assignment  to 
citizens  of  their  duty  to  support  the  state  in  proportion  to 
their  respective  abilities.  This  is  by  no  means  a  simple  con- 
ception, as  will  be  shown  by  the  analysis  which  follows,  which 
has  for  its  purpose  to  discover  in  what  manner  the  ability  of 
the  citizens  to  pay  for  the  support  of  the  state  may  be  deter- 
mined. The  point  at  issue  in  this  analysis  is  the  following: 


36  SELECTED   ARTICLES 

Is  ability  measured  by  the  amount  of  property  a  man  possesses 
or  the  income  he  enjoys,  or  does  it  increase  at  a  rate  more 
rapid  than  the  increase  in  his  property  or  his  income?  Does 
payment  according  to  ability  demand  the  acceptance  of  the 
proportional  or  of  the  progressive  principle  in  the  apportionment 
of  taxes?  The  modern  tendency,  as  shown  by  tax  reforms 
during  the  past  twenty  years,  is  toward  greater  reliance  on  the 
progressive  principle ; *  that,  however,  does  not  prove  the  principle 
to  be  a  sound  one,  although  it  may  raise  a  presumption  in  its 
favour.  The  question  as  thus  presented  calls  for  careful 
analysis. 

THE  FUNDAMENTAL   PROBLEMS2 

Amid  the  clashing  of  divergent  interests  and  the  endeavor 
of  each  social  class  to  roll  off  the  burden  of  taxation  on  some 
other  class,  we  discern  the  slow  and  laborious  growth  of 
standards  of  justice  in  taxation,  and  the  attempt  on  the  part 
of  the  community  as  a  whole  to  realize  this  justice.  The 
history  of  finance,  in  other  words,  shows  the  evolution  of  the 
principle  of  faculty  or  ability  to  pay — the  principle  that  each 
individual  should  be  held  to  help  the  state  in  proportion  to  his 
ability  to  help  himself. 

Premising  a  general  acquaintance  with  the  main  lines  of 
fiscal  evolution,  what  interests  us  here  is  the  tracing  of  the 
fundamental  ideas  on  which  the  evolution  was  based.  In  other 
words,  taking  it  for  granted — what  indeed  cannot  fail  to  be 
granted,  after  a  study  of  the  facts — that  there  has  been  a  pro- 
gressive attempt  to  realize  the  demands  of  fiscal  justice  and  a 
more  or  less  unconscious  tendency  to  work  out  the  principle  of 
ability  to  pay,  the  question  presents  itself  as  to  what  are  the 
historic  forms  of  the  test  of  this  ability.  Granted  that  in  some 
more  or  less  rough  way  an  endeavor  is  made,  almost  from  the 
beginning,  to  apportion  public  burdens  in  accordance  with  the 
presumed  capacity  of  individuals  or  classes,  the  problem  arises 
as  to  how  the  capacity  to  bear  this  burden  is  to  be  measured. 
Even  where  it  is  difficult  to  recognize  any  conscious  attempt 

1  Seligman's  chapter  on  "Recent  Reforms  in  Taxation"  in  Essays  in 
Taxation. 

3  By   Edwin   R.  A.   Seligman.     The  Income  Tax.    p.   4-18. 


TAXATION  37 

on  the  part  of  government  to  carry  this  principle  into  practice, 
and  even  where  actual  fiscal  institutions  represent  more  or  less 
thinly  disguised  efforts  of  the  dominant  economic  class  to  roll 
the  burdens  on  the  shoulders  of  the  weak, — even  here  it  is  rare 
to  find  a  cynical  disregard  of  all  consideration  of  equity;  and 
even  here  a  more  or  less  successful  effort  is  made  to  clothe  the 
hard  facts  of  economic  oppression  in  the  garb  of  some  specious 
explanation.  Thus,  whether  it  be  actually  realized  or  not,  it  is 
possible  to  interpret  the  successive  stages  of  fiscal  development 
in  terms  of  an  attempt  to  enforce  various  criteria  of  ability  to 
pay. 

From  this  point  of  view,  namely  that  of  the  norm  or  test  of 
faculty,  it  may  be  said  that  no  less  than  five  answers  have  been 
given  in  the  course  of  history.  At  the  outset,  the  individual  as 
such  was  selected  as  the  norm.  Mere  numbers  suffice  in  primitive 
society  to  answer  the  requirements  of  justice.  Thus  it  is  that 
everywhere  the  beginnings  of  direct  taxation  take  the  form  of 
the  poll  or  capitation  tax.  In  a  primitive  community  where 
private  property  has  but  slightly  developed  or  where  the  differ- 
entiation in  economic  conditions  is  insignificant,  where  there 
are  no  very  rich  and  no  very  poor,  where  every  man  works  and 
where  individual  revenue  is  derived  almost  exclusively  from 
individual  exertion,  it  is  indeed  true  that  polls  form  an  approx- 
imately satisfactory  test  of  ability  in  taxation.  Wherever  we 
have  primitive  economic  and  democratic  conditions,  whether  it 
be  in  the  early  stages  of  Teutonic  civilization  or  in  the  begin- 
nings of  Puritan  New  England,  we  find  that  the  poll  tax  forms 
an  essential  ingredient  of  the  fiscal  system. 

With  the  development  of  private  property,  however,  and 
with  the  differentiation  of  economic  classes,  a  change  sets  in. 
The  original  equality  of  wealth  is  followed  by  an  inequality 
of  possessions.  The  distribution  of  ownership,  in  other  words, 
is  now  gradually  divorced  from  the  mere  accumulation  of 
numbers.  A  poll  tax  responds  less  and  less  well  to  the  demands 
of  faculty  until  it  finally  becomes,  at  all  events  as  the  sole  test 
of  ability,  almost  wholly  a  mockery.  Efforts  may  indeed  be 
made  to  improve  the  situation  for  a  time  by  graduating  the  poll 
tax  according  to  outward  signs  so  that  the  poll  tax  in  some 
cases  becomes  a  class  tax,  the  assessment  being  graded  roughly 
in  accordance  with  the  social  position  of  the  individual.  But 


38  SELECTED   ARTICLES 

this  class  or  classified  poll  tax,  as  we  find  it  in  the  early  Middle 
Ages,  is  only  a  makeshift,  and  before  long  the  poll  tax  is 
either  supplemented  or  supplanted  by  a  property  tax. 

Property  as  the  Test  of  Faculty 

In  this  second  stage  of  development,  property  is  accepted 
as  the  test  of  faculty  in  taxation.  For- many  centuries  it  forms 
an  admirable  test.  Amid  the  rude  conditions  of  ownership 
that  we  find  at  this  stage  of  economic  life,  private  property 
consists  very  largely  of  land  and  of  appurtenances  to  land,  so 
that  the  property  tax  is  virtually  a  tax  on  real  estate.  Gradually, 
as  primitive  industry  and  commerce  develop,  various  forms  of 
personal  property  come  into  prominence  and  are  added  to  the 
tax  lists,  until  finally  the  two  elements  are  fused  together  in 
order  to  form  the  general  property  tax,  which  is  universally 
found  in  this  sage  of  economic  development.  Property  becomes 
the  only  possible  general  test  of  faculty  in  taxation  because  it 
is  the  specific  mark  of  distinction  between  classes  and  between 
individuals  within  each  class.  At  first  the  property  tax  is  shyly 
and  cautiously  added  to  the  poll  tax,  as  an  unimportant  feature 
of  the  system;  then  the  property  tax  grows  in  significance  while 
the  poll  tax  slowly  recedes ;  until  finally  the  poll  tax  disappears 
and  the  property  tax  remains  in  possession  of  the  field.  The 
general  property  tax  is  found  wherever  a  primitive  democracy 
is  accomplished  by  a  moderate  agricultural  and  commercial 
development. 

For  a  long  time  the  general  property  tax  functions  satisfac- 
torily and  responds  fairly  well  to  the  canons  of  justice  in  tax- 
ation. But  in  the  inevitable  course  of  economic  development, 
with  the  growing  differentiation  of  economic  classes  and  with 
the  increasing  complexity  of  economic  life,  certain  difficulties 
make  themselves  felt,  not  only  in  the  practical  application  of 
the  system  but  also  in  the  theoretical  basis  of  the  tax.  With 
the  practical  difficulties  of  the  system,  this  is  not  the  place  to 
deal.  The  causes  of  the  breakdown  of  the  general  property 
tax  and  the  reasons  why  it  everywhere  disappeared  in  the  later 
Middle  Ages  in  Europe  and  why  it  is  beginning  to  disappear 
in  its  last  stronghold— the  United  States— have  been  sufficiently 
expounded  elsewhere.1  What  interests  us  in  this  place  is  the 

1  See    Seligman.      Essays    in    Taxation.     Chap.    II. 


TAXATION  39 

theoretical  shortcomings  of  property  as  a  test  of  faculty  in 
taxation. 

These  shortcomings  may  be  summarized  as  follows:  In  the 
first  place,  a  gap  often  discloses  itself  between  property  and 
product.  It  is  indeed  true  that  in  the  long  run  the  value  of 
a  piece  of  property  stands  in  a  close  relation  to  its  yield.  To 
use  a  modern  phrase  that  has  become  familiar,  capital  is 
nothing  but  capitalized  income.  That  is  to  say,  what  a  piece 
of  property  will  fetch  in  the  market  represents  nothing  but 
a  capitalization  of  its  present  and  prospective  yield.  While 
this  is,  however,  true  in  the  long  run,  it  is  not  true  in  the  short 
run.  The  value  of  a  piece  of  property  may  bear  only  a  slight 
relation,  or  no  relation  at  all,  to  the  yield  of  that  property  in 
any  particular  year,  or  even  for  a  term  of  years.  Two  farmers 
may  possess  homesteads  of  equal  value.  The  one  may  have 
bad  luck  and  suffer  drought  or  inundation,  while  the  other  may 
enjoy  a  bountiful  harvest.  With  property  as  a  test  of  faculty, 
the  two  farmers  will  pay  the  same,  although  the  produce  of  their 
farms  may  differ  enormously.  Again,  of  two  house  owners 
desiring  to  rent  their  property,  one  may  succeed  and  the  other 
may  fail  for  the  year,  or  for  a  term  of  years.  Although  the 
unsuccessful  owner  has  no  income,  he  must,  with  property  as 
the  test  of  faculty,  pay  the  same  amount  as  the  other.  Instances 
might  be  multiplied,  all  tending  to  show  that  property  and 
product  may  frequently  diverge. 

In  the  second  place,  a  distinction  is  gradually  observable 
between  property  incomes  and  labor  incomes.  In  the  early 
stages  of  the  development,  where  property  owners  bear  the 
greater  part  of  the  public  burdens,  the  man  who  has  no  prop- 
erty either  is  reached  by  the  poll  tax,  or  is  of  such  slight 
taxable  capacity  that  he  is  entirely  omitted.  In  modern  times, 
however,  with  the  growth  of  lucrative  professions  and  with 
the  great  opportunities  for  rich  salaried  positions,  labor  incomes 
assume  an  importance  which  did  not  exist  in  earlier  times.  It 
may  well  be  granted  that  the  recipient  of  a  modest  salary  should 
be  put  on  a  different  plane  from  the  individual  who  receives  a 
like  income  from  invested  property;  but  that  is  a  different  thing 
from  claiming  that  lawyers  or  doctors  or  engineers  or  railway 
presidents  with  salaries  or  professional  earnings  of  from  $25,000 
to  $100,000  a  year  should  not  be  called  upon  to  contribute  at  all 


40  SELECTED   ARTICLES 

to  the  public  charges.  The  acceptance  of  property  as  the  sole 
test  of  ability  to  pay  would  result  in  a  complete  exemption  of 
such  classes,  and  would  give  rise  to  countless  well-founded 
complaints. 

In  the  third  place,  the  recognition  of  property  as  the  test 
of  ability  to  pay  raises  a  difficulty  connected  with  indebtedness. 
There  is  a  well-defined  distinction  between  the  legal  and  the 
economic  conceptions  of  property.  By  property  in  the  legal 
sense  is  meant  the  ownership  of  individuals  in  things  or  in 
rights  to  things,  irrespective  of  the  ulterior  division  of  the 
produce  of  the  property.  By  property  in  the  economic  sense — 
usually  denominated  wealth — is  meant  the  control  of  the  services 
of  the  thing  possessed.  If  a  part  of  the  services  or  produce 
has  to  be  handed  over  by  the  individual  to  some  one  else,  it 
does  not  really  form  a  part  of  his  wealth.  The  owner  of  a 
$10,000  farm  who  has  mortgaged  it  for  $5,000  possesses  wealth, 
or  property  in  the  economic  sense,  to  the  extent  of  $5,000.  That 
wealth  represents  the  amount  that  he  is  worth.  His  debts  are 
a  part  not  of  his  assets,  but  of  his  liabilities,  and  must  be  de- 
ducted from  the  assets  in  order  to  strike  a  correct  balance 
sheet.  Legally,  however, — at  all  events  under  the  modern  law 
of  mortgage — his  property  amounts  to  $10,000.  If  the  govern- 
ment, as  is  usually  the  case,  looks  at  the  piece  of  property 
rather  than  at  the  individual  condition  of  the  property  owner, 
it  will  assess  the  taxpayer  on  the  full  $10,000.  In  other  words, 
in  a  property  tax  the  expenses  incurred  in  maintaining  the 
property  are  ordinarily  not  considered. 

This  insistence  upon  the  legal  rather  than  the  economic 
conception  of  property  dates  from  the  period  when  virtually 
all  existing  credit  consisted  of  consumption  credit  rather  than 
production  credit  and  when  indebtedness  played  a  very  small 
role  in  the  social  economy.  In  modern  times,  however,  credit 
has  become  the  very  basis  of  business  enterprise.  Under  these 
circumstances  the  problem  of  indebtedness  assumes  a  new 
significance.  It  was  but  natural,  therefore,  that  the  property 
tax,  where  it  still  existed,  should  take  some  account  of  this 
new  condition  and  should  endeavor  to  make  allowance  for  debts. 
But  experience  soon  showed  that  this  attempt  was  fraught  with 
great  practical  difficulties.  As  we  have  seen  in  the  United  States, 
the  creation  of  fictitious  debts  became  such  a  paying  investment 
that  most  of  the  states  which  introduced  the  system  were  com- 


TAXATION  41 

pelled  again  to  abolish  it.  As  a  consequence,  some  states  today 
deduct  mortgage  debts  from  real  estate;  others  deduct  general 
indebtedness  from  personal  estate;  a  few  permit  deduction  for 
indebtedness  in  general;  while  most  of  the  states  allow  either 
for  no  deduction  at  all,  or  for  deduction  in  only  personal  or 
real  estate.  Such  a  situation  is  bound  to  be  unsatisfactory. 

In  the  fourth  place,  property  as  a  test  of  faculty  fails  to  draw 
the  correct  distinction  between  the  constituent  elements  of 
wealth.  In  former  times,  when  property  was  scanty  and  almost 
entirely  used  for  productive  purposes,  the  situation  was  simple. 
But  in  modern  times  a  sharp  line  must  be  drawn  between 
consumption  property  and  productive  capital,  between  property 
utilized  primarily  for  purposes  of  enjoyment  and  property  utilized 
for  the  securing  of  a  money  income.  Take  as  an  example  of 
the  first  case  a  private  library  or  art  gallery  or  park  which, 
instead  of  being  the  source  of  a  money  income,  is  really  the 
occasion  of  a  distinct  expenditure.  To  put  such  things  on  the 
same  footing  as  property  which  yields  a  money  income  is,  to 
say  the  least,  a  procedure  open  to  grave  doubt.  To  tax  property 
as  a  unit,  irrespective  of  the  kind  of  property  or  the  income 
from  the  property  or  the  outlay  connected  with  the  property, 
becomes  in  modern  times  a  source  of  increasing  embarrassment. 

Finally,  in  the  fifth  place,  the  history  of  the  general  prop- 
erty tax  has  everywhere  shown  that  there  seem  to  be  insuper- 
able difficulties  in  reaching  the  multifold  forms  of  wealth  in 
a  developed  industrial  society.  It  is  everywhere  conceded  that 
universality  of  taxation  is  one  of  the  leading  fiscal  principles; 
yet  the  growing  difficulties  of  reaching  all  the  different  forms 
of  property  inevitably  lead  to  the  escape  of  some  and  to  the 
over-assessment  of  others.  The  theory  of  the  general  prop- 
erty tax  originally  rested  on  the  assumption  that  fiscal  equality 
could  be  reached  by  taxing  all  individuals  on  their  visible 
property.  When  the  mass  of  property  split  up,  and  the  myriad 
forms  of  modern  intangible  personalty  disclosed  themselves, 
the  basis  of  the  theory  was  undermined  by  the  new  conditions, 
and  instead  of  equal  and  universal  taxation  there  was  now 
developed  a  system  of  partial  and  unequal  taxation. 

If  we  keep  in  mind  these  five  different  kinds  of  complica- 
tion, we  shall  be  able  to  comprehend  how  it  was  that  slowly 
but  surely  property  came  to  be  regarded  as  a  less  and  less 
satisfactory  form  of  taxation,  and  we  shall  not  be  surprised 


42  SELECTED   ARTICLES 

to  learn  that  it  was  gradually  replaced  by  other  tests  of  ability 
to  pay. 

Expenditure  and  Product  as  Tests  of  Faculty 

The  next  step  in  the  development  was  the  selection  of 
expenditure  as  the  criterion  of  faculty.  Expenditure  was  first 
advanced  as  the  best  test  of  ability  to  pay  toward  the  close  of 
the  Middle  Ages.  The  great  tax  reformers  of  the  sixteenth  and 
seventeenth  centuries,  like  Bodin,  Hobbes  and  Petty,  were 
influenced  chiefly  by  the  last  argument.  The  general  property 
tax  had  everywhere  become  a  mere  travesty  of  justice,  and  the 
system  was  honeycombed  by  abuses  which  seemed  to  be  entirely 
ineradicable.  To  attain  a  system  of  taxation  which  no  one 
could  escape  became  the  watchword  of  the  tax  reformers.  Since 
every  man,  rich  or  poor,  necessarily  incurs  expenditures,  a 
system  of  taxes  on  expenditure  was  now  advocated.  This  took 
the  form  of  both  direct  and  indirect  taxes  on  consumption,  as 
well  as  of  taxes  on  trade  and  business  which  were  supposed 
ultimately  to  reach  the  consumer.  Indirect  taxes  on  trade  and 
commerce  had  indeed  arisen,  at  a  comparatively  early  period, 
as  a  development  out  of  the  mediaeval  system  of  fees  and  tolls. 
But  now,  in  the  sixteenth,  seventeenth  and  eighteenth  centuries, 
every  European  country  witnessed  the  growth  of  a  system  of 
excises  or  expenditure  taxes,  which  grew  in  importance  as  the 
old  general  property  tax  dwindled.  The  general  excise  or  the 
single  excise  became  the  ideal  of  the  publicists,  and  was  in  a 
fair  way  of  being  realized  in  practice. 

While,  however,  consumption  taxes  succeeded  in  avoiding 
some  of  the  worst  abuses  of  the  general  tax,  it  was  not  long 
before  this  system  in  turn  disclosed  difficulties  in  its  operation. 
If  the  rich  man  stood  from  under  in  the  general  property  tax, 
it  was  largely  because  the  rich  man's  property  could  not  be 
reached.  With  the  development  of  expenditure  as  the  test  of 
faculty,  however,  it  was  inevitable  that  the  rich  man  should 
again  escape  his  share,  because  of  the  disparity  between  expend- 
iture and  revenue  in  the  different  social  classes.  The  lower 
we  go  in  the  economic  scale,  the  greater  is  the  lack  of  equi- 
librium between  revenue  and  expenditure.  At  the  bottom  of 
the  scale  are  those  whose  incomes  only  barely  suffice  for  their 
living,  while  at  the  top  of  the  scale  are  those  whose  expenditures, 
no  matter  how  large,  are  but  a  fraction  of  their  revenue.  In 


TAXATION  43 

the  one  case  there  is  absolutely  no  surplus  available;  in  the 
other  the  surplus  is  many  times  greater  than  the  expenditure. 
Necessarily,  under  such  a  system,  a  tax  on  expenditure  becomes 
an  increasingly  heavy  burden  on  the  least  wealthy  classes.  It 
is  for  this  reason  that  we  can  explain  the  comparatively  slight 
resistance  to  the  adoption  of  the  excise  system  throughout 
Europe  at  a  time  when  political  life  was  still  controlled  by  the 
aristocracy  of  land  or  of  moneyed  capital.  But  it  is  evident 
that  with  the  growth  of  democracy  in  more  recent  times  a  system 
of  taxation  which  inevitably  results  in  undue  burdens  on  the 
less  fortunate  members  of  society  was  destined  to  become  unpop- 
ular and  to  pass  away.  Expenditure  becomes  an  unsatisfac- 
tory test  of  ability  to  pay,  not  only  because  it  puts  a  premium 
on  the  penurious  rich  man,  but  because  it  imposes  a  crushing 
burden  upon  the  average  poor  man.  One  of  the  first  efforts 
of  the  French  Revolution  was  to  abolish  not  only  the  remains 
of  the  taille,  or  general  property  tax,  but  also  the  whole  exist- 
ing system  of  taxes  on  consumption ;  and  the  history  of  the 
nineteenth  century  in  every  progressive  country  has  been  the 
history  of  the  attempt  to  reduce  the  burden  of  the  excise  taxes 
so  far  as  they  are  still  liable  to  the  objections  mentioned  above. 
As  a  consequence,  expenditure  has  been  virtually  abandoned  as 
the  sole  test  of  faculty. 

The  next  stage  in  the  development  is  represented  by  the 
adoption  of  product  or  produce  as  the  norm  of  taxation.  We 
have  learned  of  the  shortcomings  of  property  as  the  test  of 
justice,  and  we  have  seen  that  the  adoption  of  expenditure 
in  lieu  of  property  was  supposed  to  meet  the  objections  of 
lack  of  universality.  With  the  failure  of  this  system,  how- 
ever, tax  reformers  and  progressive  governments  reverted  to 
some  of  the  other  defects  of  the  property  tax,  such  as  the  dis- 
crepancy between  the  value  and  the  yield  of  the  property,  and 
the  inequality  of  the  tax  due  to  the  escape  of  the  property 
owner.  It  was  reasoned — and  with  considerable  force — that  if 
recourse  were  taken  to  the  produce  of  the  property  rather  than 
to  the  property  itself,  several  results  would  be  achieved.  In 
the  first  place,  a  man  would  be  taxed  only  upon  what  he  actually 
received,  and  the  hardships  of  payment  without  revenue  would, 
at  once,  be  avoided;  while  secondly,  and  still  more  important, 
the  tax,  instead  of  being  assessed  on  the  whole  of  the  property, 
and  thus  being  subject  to  the  abuses  either  of  inquisitorial 


44  SELECTED   ARTICLES 

assessment  or  of  illegitimate  evasion,  would  be  levied  directly 
on  the  produce  of  the  thing  itself,  which  yielded  a  return. 
Property  would  be  split  up  into  its  constituent  elements,  and 
the  tax  would  be  levied  on  the  yield  of  each.  Thus  the  tax 
would  be  levied  on  the  produce  of  a  piece  of  land,  irrespective 
of  who  owned  the  land;  the  yield  of  the  land  was  to  be  ascer- 
tained by  a  careful  process,  and  if  the  taxes  were  not  paid  by 
some  one,  the  land  would  be  sold."  In  the  same  way  as  the  rental 
of  a  dwelling  was  easily  ascertainable,  the  house  tax  was  now 
imposed  upon  the  dwellings  when  they  were  actually  rented, 
and  only  then,  and  if  the  tax  were  not  paid  by  some  one, 
the  house  was  sold.  So  a  business  was  conceived  of  as  an 
entity,  the  product  of  which  was  to  be  measured  by  outward 
signs,  such  as  the  location  of  the  business,  the  number  of  the 
clerks,  etc.,  and  the  tax  was  imposed  upon  the  business  itself. 
A  similar  method  was  pursued  with  the  other  forms  of  property. 

Thus  there  developed  during  the  seventeenth,  the  eighteenth 
and  the  first  half  of  the  nineteenth  century,  a  system  of  taxes 
on  things  rather  than  on  persons,  or  a  system  of  taxes  on  the 
product  of  the  property  rather  than  on  the  person  of  the 
property  owner.  This  is  the  system  which  became  known 
in  France  under  the  name  of  real  taxes  (taxes  reelles)  as 
opposed  to  the  old  personal  taxes  {taxes  personnelles),  and 
which  was  termed  in  Germany  Extragssteuern  as  opposed  to 
the  old  Vermogenssteuern.  In  France  it  was  the  work  of  the 
Revolution  which  created  a  system  of  real  taxes;  in  Germany 
and  the  other  continental  countries  the  movement  had  begun 
earlier  and  was  completed  somewhat  later.  In  England,  also, 
the  same  system  developed,  being  composed,  at  the  'end  of  the 
eighteenth  century,  of  the  land  tax — the  last  survivor  of  the 
mediaeval  general  property  tax, — the  house  tax,  and  the  assessed 
taxes. 

The  adoption  of  product  or  produce  as  a  test  of  faculty 
indeed  marked  a  decided  step  forward.  But  as  time  went  on, 
and  especially  after  the  industrial  revolution,  the  shortcomings 
in  the  theory  disclosed  themselves.  The  very  excellence  of  the 
idea  of  regarding  only  the  thing  rather  than  the  person  now 
itself  gradually  became  a  weakness.  For,  after  all,  taxes  are 
paid  by  human  beings  and  not  by  inanimate  things.  A  piece  of 
property  may  be  assessed  to  taxation,  but  the  tax  must  be  paid 
out  of  the  pocketbook  or  bank  account— that  is  out  of  the 


TAXATION  45 

revenue — of  some  person.  Since,  under  the  system  of  private 
ownership,  every  piece  of  property  belongs  ultimately  to  an 
individual,  to  tax  the  yield  of  a  piece  of  property  really  means 
finally  to  tax  the  revenue  of  an  individual.  As  soon,  however, 
as  we  regard  the  relative  condition  of  individuals,  it  becomes 
apparent  that  a  system  of  taxes  on  product  is  painfully  defective. 
Two  adjoining  pieces  of  property,  for  instance,  may  enjoy  pre- 
cisely the  same  yield;  yet  in  the  one  case  the  yield  may  be 
due  exclusively  to  the  bounty  of  nature,  and  in  the  other  case 
it  may  be  the  result,  in  large  part,  of  the  supplementary  efforts 
of  the  owner.  Allowance  may  indeed  be  made  for  this  state  of 
affairs  by  distinguishing  the  net  from  the  gross  produce,  and 
by  levying  the  tax  on  the  former.  Primitive  land  taxes,  for 
instance,  like  the  tithes  of  old,  were  taxes  on  gross  produce; 
whereas  the  more  approved  modern  form  of  product  taxation 
is  a  tax  on  net  produce;  that  is,  making  allowance  for  the 
expenses  of  cultivation.  But  this,  although  an  undeniable  step 
in  advance,  is  not  sufficient;  for  a  system  even  of  net  produce 
taxes  does  not  take  account  of  the  indebtedness  of  the  individual. 
The  net  produce  of  two  farmers,  after  allowing  for  the  expenses 
of  cultivation,  may  be  precisely  the  same;  but  if  the  owner  of 
one  farm  has  purchased  it  on  a  mortgage,  his  final  net  earnings 
will  be  less  than  that  of  his  neighbor.  The  net  produce  of  a 
piece  of  property,  in  other  words,  is  no  necessary  indication  of 
the  net  revenue  of  the  owner.  The  tax  upon  the  thing,  just 
because  it  is  upon  the  thing,  does  not  lend  itself  readily  to  the 
shifting  conditions  of  the  man  who  owns  the  thing;  and  yet 
the  real  ability  of  a  person  to  pay  taxes  must  be  in  some  rela- 
tion to  his  individual  condition.  Moreover,  the  immense  in- 
crease in  modern  wealth  and  the  appearance  of  prodigious 
fortunes  have  contributed  to  bring  into  prominence  the  idea 
of  graduated  taxation.  Manifestly,  however,  a  system  of  real 
taxes  or  taxes  on  product  does  not  lend  itself  to  the  progres- 
sive principle.  The  larger  piece  of  land  may  be  owned  by  the 
poorer  man,  and  the  great  wealth  of  the  rich  man  may  consist 
of  a  number  of  relatively  small  separate  pieces  of  property. 
A  system  of  taxation  which  in  its  very  nature  does  not  admit  of 
progression  evidently  could  not  permanently  respond  to  the 
necessities  of  the  situation.  With  the  revolution  in  the  conception 
of  faculty,  the  tax  on  product  or  on  things  thus  came  to  be 
continually  more  unsatisfactory.  Just  as  the  gross  produce 


46  SELECTED   ARTICLES 

system  gave  way  to  the  net  produce  system,  so  now  the  net 
produce  system  in  its  turn  was  bound  to  disappear. 

Income  as  the  Test  of  Faculty 

It  was  thus  that  the  fifth  and  final  stage  was  reached,  and 
that  income  was  selected  as  the  test  of  faculty  in  taxation. 
And  there  is  no  doubt  that,  taking  it  by  and  large,  this  responds 
more  accurately  to  modern  demands  than  any  of  the  preceding 
tests.  Accordingly,  for  a  time,  it  seemed  as  if  the  new  test 
would  supplant  all  the  other  criteria,  and  as  if  all  direct  taxes 
at  least  would  be  abolished,  to  be  replaced  by  a  single  income 
tax.  Here  again,  however,  more  careful  study  disclosed  certain 
weaknesses  and  disadvantages  in  income  as  the  sole  test  of 
ability  to  pay.  What  are  these  weaknesses? 

In  the  first  place  there  is  the  difficulty  of  deciding  with 
accuracy  what  income  really  means.  Do  we  mean  by  income 
gross  or  net  income;  and,  if  the  latter,  do  we  include  in  the 
term  everything  that  comes  in  within  a  definite  period,  or  should 
gifts,  inheritances,  and  speculative  revenues  be  excluded? 
Furthermore,  do  we  mean  by  income  only  money  income,  or 
also  the  equivalent  of  money  income?  These  points  will  be 
discussed  below.  Even  assuming,  however,  that  a  satisfactory 
conclusion  has  been  reached  on  this  matter,  the  next  difficulty 
arises  from  the  fact  that  all  incomes  do  not  afford  equally  good 
criteria  of  a  man's  ability  to  pay.  Is  an  income  of  $1,000  derived 
from  hard  personal  work  to  be  put  exactly  on  a  par  with  an 
income  of  $1,000  derived  from  an  inheritance,  or  from  a  lucky 
turn  in  the  market?"  The  further  question  arises  as  to  whether 
different  amounts  of  income  present  identically  the  same  criteria 
of  ability  to  pay.  Is  $1,000  which  forms  the  entire  income  of  a 
day  laborer  to  be  treated  in  the  same  way  as  the  $50,000  income 
of  a  millionaire?  Manifestly,  the  identical  rate  on  all  kinds 
and  amounts  of  income  does  not  constitute  an  ideal  criterion 
of  tax-paying  ability.  But  still  further,  even  if  we  assume 
that  these  difficulties  are  in  some  way  disposed  of,  let  us  compare 
the  two  following  cases :  A  is  a  bachelor,  in  good  health,  with 
no  independent  relatives,  residing  in  a  small  town  where  the 
scale  of  life  is  simple,  and  so  little  interested  in  charity  or 
public  affairs  that  he  lays  by  a  considerable  amount  every  year. 
B  is  the  recipient  of  precisely  the  same  amount  of  income,  but 
is  a  married  man,  with  a  large  family;  he  lives  in  a  great  city 


TAXATION  47 

with  its  multitudinous  social  demands;  he  is  in  poor  health  and 
must  spend  considerable  sums  on  physicians  and  medicines;  he 
has  relatives  dependent  upon  him;  and  he  is  such  a  model 
citizen  that  he  gives  largely  to  charities  and  to  public  purposes. 
Can  it  be  said  that  these  two  men,  with  precisely  the  same 
income,  have  precisely  the  same  ability  to  pay?  Finally,  let 
us  take  the  case  of  two  men,  one  of  whom  has  invested  a  large 
sum  in  business  or  in  securities  which  yield  a  definite  annual 
revenue,  while  the  other  has  invested  the  same  amount  for 
speculative  purposes  in  a  piece  of  real  estate  which  remains 
unimproved  and  therefore  unrented,  or  in  a  railway  stock  which 
happens  that  year  to  pay  no  dividends.  Can  it  be  said  that  the 
latter  has  no  ability  to  pay  at  all,  as  compared  with  the  former, 
because  he  receives  no  income? 

These  are  but  a  few  of  the  perplexing  problems  that  con- 
front us  as  soon  as  we  make  the  claim  that  income  is  a 
perfectly  satisfactory  or  ideal  test  of  faculty  As  a  matter 
of  fact,  while  income  is  in  many  respects  a  better  test  than 
any  of  the  preceding  criteria  that  have  been  mentioned,  it  is 
not  a  thoroughly  adequate  test,  for  the  simple  reason  that  no 
single  test  of  ability  can  be  found  which  will  adjust  itself  to 
the  varying  needs  of  individuals. 

It  is  for  this  reason  that  the  early  enthusiasm  for  the 
single  income  tax,  even  in  theory,  gradually  died  away,  and  it 
was  realized,  to  an  ever  increasing  extent,  that  income  must 
be  supplemented  by  the  other  tests  of  faculty  in  order  to  form 
a  well-rounded  whole.  No  modern  tax  system,  accordingly, 
relies  entirely  upon  an  income  tax,  even  as  the  sole  direct  tax. 
Each  of  the  preceding  tests,  while  unsatisfactory  in  itself,  never- 
theless possesses  some  advantages  which  can  be  utilized  in 
framing  a  system  of  taxation ;  property,  product,  expenditure, 
nay,  even  polls — each  in  turn  can  be  employed  as  a  partial  test 
of  faculty  in  order  to  fill  out  certain  gaps.  For  instance, 
property  may  be  utilized  as  a  partial  test  in  the  case  of  wealth 
held  for  enjoyment,  rather  than  for  gain;  in  the  case  of  property 
invested  for  speculative  purposes ;  in  the  case  of  property  where, 
notwithstanding  the  temporary  cessation  of  product,  the  money 
value  is  by  no  means  negligible ;  in  the  case  of  a  desire  to  tax 
property  incomes  at  a  higher  rate  than  labor  incomes ;  and,  finally, 
in  the  case  of  great  fiscal  exigencies  where  it  is  necessary  to 
take  a  part  of  the  property  itself,  rather  than  simply  its  income. 


48  SELECTED   ARTICLES 

A  tax  on  product  may  be  essential  where  a  personal  tax  on  the 
individual  would  be  impracticable.  A  tax  on  expenditure  is 
sometimes  desirable  either  where  the  income  cannot  be  ascer- 
tained or  where,  because  of  the  temporary  character  of  the 
individual's  sojourn,  a  property  or  income  tax  could  not  well 
be  enforced.  To  assert,  therefore,  as  is  often  done  by  super- 
ficial thinkers,  that  the  income  tax  is  the  fairest  of  all  taxes, 
is  to  maintain  an  untenable  position.  Purely  as  a  matter  of 
theory,  even,  an  income  tax  is  by  no  means  always  the  fairest 
of  all  taxes.  The  most  that  can  be  said  with  accuracy  is  that, 
in  the  main,  so  far  as  direct  taxes  are  concerned,  the  system  of 
taxation  ought  to  be  so  framed  as  to  correspond  roughly  with 
the  income  of  the  various  classes  of  taxpayers.  But  to  say 
that  the  ideal  can  be  reached  by  any  single  income  tax  is 
preposterous.  While  the  system  of  taxation  should  endeavor, 
roughly  at  all  events,  to  adjust  itself  to  income  in  general,  the 
income  tax  as  such  can  form  only  a  part,  even  though  it  may 
be  a  permanent  part,  of  the  system,  the  other  elements  of 
which  must  be  based  upon  the  remaining  criteria  of  faculty  in 
order  to  reach  as  close  an  approximation  to  justice  as  may  be 
possible. 

Finally,  we  are  confronted  by  the  question  of  the  practical 
working  of  the  income  tax.  Even  if  the  income  tax  were  the 
fairest  of  all  taxes, — which,  as  we  have  seen,  is  not  necessarily 
true, — the  decision  as  to  whether  it  ought  to  be  utilized  would 
depend  largely  upon  whether  this  fairness,  which  is  predicated 
of  it  in  the  abstract,  would  ensue  in  actual  practice.  It  is 
notorious,  however,  that  of  all  taxes  the  income  tax  is  perhaps 
the  most  difficult  to  assess  with  scrupulous  justice  and  accuracy; 
so  that  what  is  conceived  in  justice  often  results  in  crass 
injustice.  If,  therefore,  we  add  these  great  practical  defects 
to  what  are  undeniable  theoretical  shortcomings,  we  are  forced 
to  the  conclusion  that  the  income  tax  is  by  no  means  the  panacea 
which  it  has  often  been  represented  to  be. 

With  all  these  reservations,  however,  there  is  no  doubt  that 
in  the  struggle  for  social  and  fiscal  justice  the  income  tax  is 
assuming  a  continually  more  prominent  part,  and  if  we  do 
not  pitch  our  expectations  too  high,  we  can  understand  why 
this  should  be  so.  Under  certain  conditions  the  efficiency  of 
the  income-tax  administration  may  gradually  be  improved,  and 
under  most  conditions  the  addition  to  the  tax  system  of  the 


TAXATION  49 

right  kind  of  an  income  tax  constitutes  an  undoubted  step  in 
advance.  To  ascertain  what  these  conditions  are,  and  what 
constitutes  the  right  kind  of  an  income  tax,  is  therefore  a  study 
eminently  necessary. 


BRIEF  EXCERPTS 

It  can  be  proven  that  the  average  American  citizen  works 
one  month  out  of  the  year  for  the  sake  of  being  governed,  in 
other  words,  taxation  takes  one-twelfth  of  his  earnings.  Robert 
Luce.  Public  Opinion.  13:51  April  23,  1892. 

The  characteristic  of  the  best  tax  is  not  that  it  is  most 
nearly  proportioned  to  the  means  of  individuals,  but  that  it  is 
easily  assessed  and  collected,  and  is  at  the  same  time  most 
conducive  to  the  public  interests.  Hugh  McCulloch.  Taxation 
and  Funding,  p.  18. 

No  sound  tax  policy  can  be  formulated  that  does  not  take 
into  due  account  all  of  the  principles  above  announced.  But  the 
basic  principle  that  taxation  should  be  imposed  as  nearly  as 
possible  in  proportion  to  relative  ability  to  pay,  commands  the 
unanimous  approval  of  the  Committee,  and  in  that  position  it  is 
believed  to  be  in  accord  with  the  best  modern  opinion  of  political 
economists  and  authorities  upon  taxation  in  all  countries.  Report 
of  the  Joint  Special  Committee  on  Revenue  and  Taxation.  South 
Carolina.  1921.  p.  52. 


PART  II 
THE  SALES  TAX 


BRIEF 

RESOLVED:  That  it  would  be  better  for  the  United  States  to 
adopt  a  general  sales  tax  in  place  of  the  higher  surtaxes  on 
income  and  the  excess  profits  tax. 


AFFIRMATIVE 

INTRODUCTION: 

A.  Surtaxes  on  income  and  excess  profits  taxes  defined 
and  explained. 

B.  General  sales  tax  explained. 

C.  Importance  of  the  question. 

I.     The    higher   surtaxes   on   incomes   and   the   excess  profits 
tax  have  failed  completely. 

A.  They  are  wrong  in  principle. 

1.  They  tax  some  people  at  higher  rates  than  others. 

2.  The  rates  of  the  surtaxes  are  too  high — the  highest 
in  the  world   in   1920. 

3.  They  collect  the  bulk  of  the  revenue  on  income, 
which  is  a  very  poor  basis  for  a  system  of  taxation 
because  it  is  variable  and  intangible. 

B.  They  have  not  been  successful  as  taxes. 

1.  They  are  difficult  and  costly  to  collect. 

2.  They  are   extremely  inquisitorial. 

3.  They  do  not  yield  sufficient  revenue. 

a.     The  yield  falls  off  very  greatly  in  a  year  of 
depression. 

4.  They  are  evaded  more  and  more. 

a.  By  issuing  stock  dividends. 

b.  By  buying  tax  exempt  securities. 

c.  By  selling  stock  and  liberty  bonds,  so  as  to 
show  a  loss,  and  then  buying  them  back  again. 


54  SELECTED   ARTICLES 

C.     They  have  produced  many  harmful  results. 

1.  They  drive  large  incomes  into  tax  exempt  secur- 
ities. 

a.     This  prevents  accumulations  of  savings  avail- 
able for  investment. 

2.  They  encourage  extravagance  in  business. 

a.     Foresight    and    careful    management    are    no 
longer  rewarded. 

3.  They  encourage  overcapitalization. 

4.  They  increase  prices  unduly. 

II.     A  general  sales  or  turnover  tax  would  remedy  these  evils. 

A.  It  is  sound  in  theory. 

1.  It   falls  upon   all   alike — those   who  consume   the 
most  would  pay  the   most  in  taxes. 

2.  It  is  easy  and  cheap  to  collect:  the  tax  would  be 
added  to  the  selling  price  without  elaborate  and 
expensive  government  machinery. 

3.  It  would  be  constant  in  yield. 

4.  It    is    a    broad   and    sure   basis   for   taxation:    a 
slight  change  in  the  rate  would  greatly  increase 
the  yield. 

B.  It  would  not  disturb  general  business  conditions. 

1.  It  would  encourage  thrift  and  investments,   and 
tax  only  extravagance. 

2.  A  very  low  rate  on  all  sales  would  yield  a  large 
government  income. 

a.     Prices  would  not  be  greatly  raised. 

III.    The  sales  tax  is  a  practicable  remedy. 

A.  It  has  been  used  with  great  success  in  France,  Canada, 
Germany,  Mexico,  and  the  Philippine  Islands. 

B.  It   is   endorsed   and   recommended   by   many   of   our 

ablest  financiers  and  businessmen. 

1.  Otto  H.  Kahn. 

2.  Jules  S.  Bache. 

3.  Charles  H.  Lord. 

4.  Myer  D.  Rothschild. 

5.  Senator  Reed  Smoot 


TAXATION  55 

NEGATIVE 

INTRODUCTION: 

A.  The  plan  and  working  of  the  surtaxes  on  income  and 
excess  profits  taxes  explained. 

B.  The  plan  of  the  sales  tax  explained. 

C.  The  support  of  the  sales  tax  is  chiefly  the  propaganda 
of  a  few  New  York  bankers. 

D.  There  is  much  loose  talk  about  taxing  extravagance, 
or  taxing  sales,  or  taxing  tobacco,  but  a  government 
can  tax  only  its  people  and  it  should  tax  them   in 
proportion  to  their  ability  to  pay. 

1.     The  surtaxes  on  income  and  the  excess  profits  tax  have 
worked  remarkably  well  under  the  circumstances. 

A.  They  were  well  and  carefully  planned. 

i.    The  government  had  the  advice  and  help  of  the 

ablest  tax  experts  in  framing  them. 
2.    All   allowances   have   been    made   not   to   hinder 
business  or  work  any  hardships. 

B.  They  have  been  successful  as  taxes. 

1.  They  are  easy  and  cheap  to  collect. 

2.  They  are  very  difficult  to  evade. 

3.  It  is  impossible  to  shift  them  to  others. 

4.  They  yield  the  funds  the  government  needs. 

5.  Their  yield  has  been  all  that  was  expected. 

C.  They  are  equitable,  just,  and  fair. 

1.  They    fall    upon    people    in    proportion    to    their 
ability  to  pay. 

2.  They    supplement    the    tariff    taxes,    the    internal 
revenue  and  excise  taxes,  and  the  other  federal 
taxes  which  unjustly  and  unfairly  put  the  burden 
of  taxation  on  the  poor. 

3.  For  the  first  time  in  American  history  our  scheme 
of  federal  taxation  has  been  fair  and  just  to  the 
poor  people. 

a.  This  is  better  for  the  country  because  the 
rich  will  now  be  more  interested  in  good 
government. 


56  SELECTED   ARTICLES 

D.     They  do  not  interfere  with  legitimate  business. 

1.  Somebody  must  bear  the  burden  of  war  taxation 
for  generations  to  come,  and  all  should  bear  it 
in  proportion  to  their  ability  to  pay. 

2.  A   legitimate   margin   of  profit   is   left  to  honest 
business  enterprises. 

II.     A  sales  tax  is  very  undesirable. 

A.  A  sales  tax  in  place  of  the  surtaxes  and  excess  profits 
tax  would  put  the  whole  burden  of  war  taxation  upon 
the  poor. 

1.  It  would  all  be  shifted  to  the  ultimate  consumer, 
a.     This    would    greatly   increase    prices — the    tax 

would  pyramid,  so  that  the  ultimate  consumer 
would  pay  much  more  than  ever  comes  into 
the  treasury  of  the  government. 

b.  It  would  be  a  tax  against  a  living  wage. 

c.  People  would  be  taxed  in  proportion  to  their 
needs,  not  in  proportion  to  their  ability  to  pay. 

2.  The  rich  would  practically  cease  to  bear  any  of 
the  burden  of  war  taxation. 

B.  It  would  tend  to   disorganize  business. 

I.     Business  would  have  to  adjust  itself  to  the  new 
conditions. 

2.  Every  change  in  the  rate  or  the  subjects  of  the 
tax  would  necessitate  a  business  readjustment. 

3.  Periods    of    contemplated    change    would    bring 
uncertainty  and  chaos  to  the  business  world. 

O     It  would  strengthen  and  entrench  trusts  and  monopolies 
and  crush  out  small  competing  establishments. 
I.     It  would  give  a  very  great  and  unfair  advantage 
to   those   industries   which   combine   several   proc- 
esses   of   manufacture   over    competing    industries 
that  perform  only  one  or  two  of  these  processes. 
D.     It  would  threaten  and  endanger  American  institutions. 

1.  It  would  cause  discontent  and  unrest  among  the 

poor. 

2.  It  would  aid  the  cause  of  Socialism  and  Bolshev- 
ism. 


TAXATION  57 

III.    The  sales  tax  is  impracticable. 

A.  It  would  be  difficult  to  collect. 

1.  Most  people  in  small  business  enterprises  do  not 
keep  track  of  their  individual  sales. 

2.  There  is  no  way  of  knowing  when  such  a  person 
is  paying  all  he  has  collected  from  the  consumers. 

3.  It  would  amount  to  "farming  out"  the  taxes. 

B.  It  is  easy  to   evade. 

I.     Much  more  would  be  paid  by  the  consumers  than 
would  be  received  by  the  government. 

C.  It  is  doubtful  of  yield. 

I.     It  would  fall  off  very  greatly  in  a  time  of  indus- 
trial depression. 

D.  There  is  nothing  in  the  experience  of  other  countries 
to  justify  us  in  this  experiment. 

1.  Most  anything  "goes"  in  a  partially  civilized  sub- 
ject nation  like  the  Philippine  Islands. 

2.  Canada's  experience  with  the  sales  tax  is  far  from 
satisfactory. 

a.  It  only  applies  to  a  very  small  part  of  the 
sales,  and  exempts  all  of  the  necessities. 

b.  It  has  been  tried  but  a  short  time. 

3.  It  has  been  a  disappointment,  indeed  a  failure  in 
France.     (Nation  112:683) 

4.  We  are  not  ready  to  pattern  any  of  our  govern- 
mental affairs  after  Mexico. 

a.  The  report  of  the  Carranza  Tax  Commmis- 
sion  on  a  Model  Tax.  Plan  recommended 
the  repeal  of  the  sales  tax. 

iv      The  sales  tax  is  opposed  by  practically  all  the  recog- 
nized authorities  on  taxation. 

1.  Prof.  Edwin  R.  A.  Seligman  of  Columbia. 

2.  Prof.  Thomas  S.  Adams  of  Yale. 

3.  Prof.  Fairchild  of  Yale. 

4.  Prof.  Kemmerer  of  Princeton. 

5.  Robert  H.  Montgomery. 

6.  Joseph   W.    Fordney. 

7.  David   A.   Wells. 


BIBLIOGRAPHY 

An  asterisk  (*)  preceding  a  reference  indicates  that  the  article  or 
a  part  of  it  has  been  reprinted  in  this  volume.  A  dagger  (|)  is  used  to 
indicate  a  few  of  the  other  best  references. 

OTHER  BIBLIOGRAPHIES 

Bulletin  of  the  National  Tax  Association.     6  :  194-5.     Mr.  '21. 

•The  graduated  income  tax. 
Kolchin,  Morris.     War  taxation  1914-1917.     List  of  references 

to  material  in  the  New  York  Public  Library.     Reprint  from 

the  Bulletin  of  the  New  York  Public  Library,  July,  1917.  I4p. 
Library  of  Congress.  List  of  references  on  excise  or  internal 

revenue  taxation,  with  special  reference  to  consumption  taxes. 

1918.     typewritten.     8p. 

GENERAL  REFERENCES 

Books  and  Pamphlets 
*  Adams,  Thomas  S.     Needed  tax  reform  in  the  United  StatesV 

New  York  Evening  Post.     1920. 
Commissioner    of    Internal    Revenue.      Statistics    of    incomes. 

Government  Printing  Office.    1921.    I50p. 

Committee  on  Ways  and  Means.    United  States  House  of  Rep- 
resentatives.   Sales  tax  laws  of  foreign  countries.    40p.    1921.  * 
Douglas,  J.   R.     Proposed   federal  tax  on  sales:   a  review  of    , 

the  arguments  for  and  against.     Security  Trust  and  Savings*^ 

Bank.    Los  Angeles.     1921.     I9p. 
Equitable  Trust  Company  of  New  York.     Revenue  act  of  1918. 

1919-     238p. 
Guaranty   Trust   Company   of   New   York.     Federal   taxes   on 

income  and  profits  imposed  by  the  revenue  act  of  1918.     1920. 

196?. 
Montgomery,  Robert  H.    Income  tax  procedure  of  1921.    Ronald 

Press  Co.     1921. 


60  SELECTED   ARTICLES 

National  Tax  Association.    Thirteenth  annual  conference,   1920. 
1921. 

p.  209-19.      Discussion  of  the  sales  tax. 
p.  262-72.     Discussion  of  the  sales  tax. 

Plehn,  Carl  C.    British  and  American  income  and  excess  profits 

taxes  compared.     Continental  Insurance  Co.     1920. 
Plehn,    Carl    C.      Introduction    to    public    finance.     Macmillan.  y 

1920. 

p.  277-9.       The  surtaxes. 
*Revenue   Revision.     Hearings   before  the   committee  on  ways     . 

and  means  of  the  House  of  Representatives.    1921.   2;op. 

Periodicals 
American   Economic   Review.     8  :  sup.   no.    I.     18-54.     Mr.   '18. 

Federal  taxes  upon  income  and  excess  profits.     Thomas  S. 

Adams  et  al.  , 

fAmerican  Economic  Review.    9  1213-43.    Je.  '19.    The  revenue*^ 

act  of  1918.    R.  G.  &  G.  C.  Blakey. 
t  American   Economic   Review.    9  :  sup.  no.   2.    2-142.    Mr.   '19.  / 

Report  of  the  committee  on  war  finance  of  the  American 

Economic  Association. 

p.     4-48.  The  federal   income  and  excess  profits  tax. 

p.  49-62.     Consumption  and  other  indirect  taxes. 

p.  63-74.  Federal  land  and  capital  taxes. 

American  Economic  Review.     9  : 502-16.     S.  '19.     Statistics  ofy/ 

income.     David  Friday. 
American  Economic  Review.     10  :  1-32.     sup.     Mr.  '20.     British 

experience   with    excess   profits   taxation.      Robert    M.    Haig 

et  al. 
t American  Economic  Review.     10  :  283-98.    Je.  '20.    War  profits ./ 

and  excess  profits  taxes.     Carl  C.  Plehn. 
American  Economic  Review.     10  :  785-99.     D.  '20.     Suggestions 

for  revision  of  the  federal  taxation  of  income  and  profits. 

Fred  R.  Fairchild. 
American  Economic  Review,     n  :  sup.  no.  I.     148-70.     Mr.  '21. y 

Federal    Taxation   on    income   and  profits.     Fred    R.    Fair- 
child  et  al. 
Annals  of  the  American  Academy.     58  :  15-31.     Mr.  '15.     Some 

aspects  of  the  income  tax.     Mortimer  L.  Schiff. 
Annals  of  the  American  Academy.  58  :  32-43.    Mr.  '15.  Amending 

the  federal  income  tax.     Roy  G.  Blakey. 
Annals  of  the  American  Academy.  95  :  207-12.  My.  '21.    Incidence  »/ 

of  a  sales  tax.     G.  Hayes. 


TAXATION  61 

Bulletin  of  the  National  Tax  Association.     4  :  14-20.     O.  '18. 

Pending  revision  of  the  income  and  profits  taxes.    Alfred  E. 

Holcomb. 
Commerce  and  Finance.  10  1655-6.    My.  u,  '21.  Canada's  experi- ^ 

ment  with  the  sales  tax.    W.  G.  Gates. 
Commerce  Monthly.    2  : 3-13.    Mr.  '21.    The  sales  tax  and  our  •'" 

fiscal  system.     Henry  A.  E.  Chandler. 
Economic  Journal.     27  : 561-5.     D.   '17.     New   taxation   in   the^ 

United   States. 
Economic  World,   n.s.    19  : 628-31.     My.   I,   '20.     The  national 

debt  and   correct  principles   of  post  war  taxation.     W.   F. 

Gephart. 
Economic  World,   n.s.     21  : 485-6.     Ap.  2,   '21.     The  powerful 

inflationary  influence  of  the  proposed  federal  sales  tax.     F. 

W.  Burrows. 
Industrial  Management.    58  :  148-52.    Ag.  '19.    Depreciation  and 

the  federal  income  tax.     Charles  W.  McKay. 
Literary  Digest.     58  :  78-80.     S.  28,  '18.    Taxation  placing  great 

checks  on  growth  in  great  fortunes. 
Literary  Digest.     59  : 8-9.     D.  21,   '18.     War  taxes   for  peace 

years. 

Literary  Digest.    60  :  14.    F.  22,  '19.    Taxes  that  compel  thrift.^ 
Literary  Digest.     65  : 20-1.     Ap.  3,  '20.     The  war  on  our  war*' 

taxes. 

Literary  Digest.   69  17-11.   Ap.  2,  '21.    Tax  relief  demanded  be- 
fore tariff  revfsion. 

Literary  Digest.     69  : 9-10.     Ap.  23,  '21.     A  new  tax.X 
Literary  Digest.     69  :  70.     My.  7,  '21.     French  experience  with  *, 

the  sales  tax. 
Literary  Digest.     69  : 19-21.     My.  14,  '21.     Canada's  experience^ 

with  the  sales  tax. 
Nation.    107  : 314-16.    S.  21,  '18.    Federal  and  state  war  taxation,  j 

Carl  C.  Plehn. 

Outlook.     122  :  143.     My.  28,  '19.    The  new  income  tax. 
Quarterly  Journal  of  Economics.     32  :  1-37.     N.  '17.     The  war 

tax  act  of   1917.     Frank  W.  Taussig. 
Quarterly  Journal   of   Economics.     35:618-33.     Ag.   '21.     The-' 

literature  on  the  sales  tax. 
Quarterly  Journal  of  Economics.    35  :  363-93-    My.  '21.     Should 

the  excess  profits  tax  be  repealed.    Thomas  S.  Adams. 


62  SELECTED   ARTICLES 

Review  of  Reviews.    63  : 53-7.    Ja.  '21.    The  treasury's  plan  for  ^ 

federal  taxes.     David  F.  Houston. 
Review  of  Reviews.    63  :  202.    F.  '21.    Sales  tax  in  the  Philippine  ^ 

Islands. 

Searchlight.    5  :  5-6.    Mr.  '21.   A  general  sales  tax.  * 
Searchlight.     5  : 9.     Ap.  '21.     Shifting  the  tax  burdenX 
Searchlight.    5  : 13-15.    Ap.  '21.    A  substitute  for  the  sales  tax.v/ 

Walter  W.  Liggett. 
World's   Work.    42  : 586-9.    O.   '21.     What  you  need  to  know 

about  federal  taxation.     David  F.  Houston. 

AFFIRMATIVE  REFERENCES 
Books  and  Pamphlets 

Bache,  Jules  S.     The  blight  of  taxation  on  American  business. 

1920.     I2p. 

Bache,  Jules  S.    The  power  to  tax  is  the  power  to  destroy.    1921. 
Bache,  Jules  S.     A  practical  tax  in  lieu  of  confiscation.     1920.  / 

I4P. 
Bache,  Jules  S.     Release  business  from  the  slavery  of  taxation. •/ 

1920.    i6p. 

Bache,  Jules  S.    The  sales  tax  the  only  answer.     1921.     I2p.  S 
Bache,  Jules   S.     The  turnover  tax — the  only  way  out.     1921.  / 

P.  33- 

Cornwell,  William  C.     The  cancer  of  taxation  and  how  to  cure/ 

it.     1921.     I9P. 
Cornwell,  William  C.     An  intolerable  situation — the  gross  sales  / 

tax  the  remedy.     1920.     i6p. 
Cornwell,  William  C.    The  sales  tax  or  tax  on  turnover.     1920.^ 

I2p. 

Frey,  Morris  F.    Needed  reform  in  the  present  tax  laws.    Guar- 
anty Trust  Co.  of  New  York.     1919.     I9P-  , 
Kahn,  Otto  H.    Addendum  to  "Some  suggestions  on  tax  revision" ' 

and  the  sales  tax.     1920.    43p. 

Kahn,  Otto  H.  The  effect  of  tax  revision  on  prosperity.  1921.  8p.  / 
Kahn,  Otto  H.  Some  suggestions  on  tax  revision.  1920.  75p.<" 
Kahn,  Otto  H.  Ten  years  of  faulty  taxation  and  the  results./ 

1920.     Pamphlet.     52p. 
*Lord,  Charles  E.    Copy  of  memorandum  or  brief  filed  with  the  J 

tax  committee  of  the  National  Industrial  Conference  Board 

Ap.   1920. 


TAXATION  63 

Lord,  Charles  E.     Federal  taxes  and  the  farmer.    1920.    4p.  " 
Lord,  Charles  E.    Making  taxation  a  political  asset  instead  of  a  - 

liability.    1920.    4p. 

Lord,  Charles  E.    Taxing  a  soap  bubble.    1920.   4p.    ^ 
*National   Association   of   Manufacturers.     Proceedings   of   the 

twenty-fifth  annual  convention  1920. 

p.  14-22.  Report  of  the  committee  on  taxation. 

National    Tax    Association.      Thirteenth     (1920)     annual    con- 
ference.    Proceedings.     1921. 

p.  117-56.     Some  suggestions  for  the  simplification  of  federal  taxation. 
Hugh  Satterlee. 

p.  169-80.     Investigations     and    activities    of    The    National    Industrial  ^ 
Conference  Board.      R.   C.   Allen. 

p.  180-209.     The  gross  sales  or  turnover  tax.     Meyer  D.  Rothschild. 

Rothschild,  Meyer  D.    Gross  sales  or  turnover  tax  at  I  per  cent 

and  no  other  tax  on  business.     1920.    3ip. 
Rothschild,  Meyer  D.  et  al.    Primer  gross  sales  or  turnover  tax, 

1920.     i8p. 
Rothschild,  Meyer  D.  et  al.    Primer  gross  sales  or  turnover  tax, 

not  exceeding  I  per  cent  and  no  other  tax  on  business.    1921. 

52p. 

Satterlee,  Hugh.    Revision  of  federal  taxation.     1920.    I3p. 
Satterlee,  Hugh.    Taxation  of  sales.    1920.    i8p. 
Wilfley,  Lebbcus  R.     A  sales  tax  the  only  remedy.     1921.    2ip. 

Periodicals 

*  Administration.    I  :  659-66.    My  '21.    Why  a  sales  tax.     B.  S.*^ 

Orcutt. 
Annalist.    16  : 3-4.    Jl.  5,  '20.    Gross  turnover  tax  as  a  substitute  ^ 

for  existing  laws.     Meyer  D.   Rothschild. 
Bulletin  of  the  National  Tax  Association.     6:263-9.     Je.  '21.  ^ 

Overturn  sales  tax  on  commodities.     B.  S.  Orcutt. 
*Congressional  Record.  61  :  651-5.    Ap.  27,  '21.    Address  of  Hon.,^ 

Reed   Smoot  in   the  United   States   Senate. 
Congressional  Record.    61  :  6964-73.  O.  n,  '21.    Speech  of  Senator*^ 

Reed  Smoot. 
Current  Opinion.    68  :  116-17.    Ja.  '20.    Danger  of  the  income  tax 

law  making  Bolsheviki.     Edward   H.   Bierstadt. 
Current  Opinion.     70  : 451-3.     Ap.  '21.     If  you  want  prosperity,^, 

abolish  the  income  tax.    Frank  Crane. 


64  SELECTED   ARTICLES 

Current  Opinion.    71  :  520-1.  O.  '21.    Canada  has  a  painless  sales  ^ 

tax  that  yields  $50,000,000. 
Economic  World,  n.s.     17  : 593-5.    Ap.  26,  '19.     The  expediency 

of    existing   federal   taxation.     Otto    H.    Kahn. 
Economic  World,  n.s.    17  : 910-11.    Je.  28,  '19.    Canadian  opinion 

about  the  effect  of  severely  graduated  income  taxation  upon  ^ 

industrial  leadership.  \ 

Economic  World,    n.s.    18  1306-7.   Ag.  30,  '19^  The  federal  tax    / 

on  sales  as  it  would  effect  the  price  of  beef  to  the  ultimate^ 

consumer. 
fEconomic  World,    n.s.    21:  341-3.    Mr.  5,  '21.    The  sales  tax ,/ 

and  our  fiscal  system.     Henry  A.  E.  Chandler. 
Forum.    64  :  191-7.     S.  '20.     Where  the  taxes  should  be  placed./ 

Charles  E.  Lord. 
Forum.    64  : 253-68.    N.  '20.     Some  suggestions  on  tax  revision. 

Otto  H.  Kahn. 
Forum.    64  :  421-40.    D.  '20.    Suggestions  for  tax  revision.    Otto 

H.  Kahn. 
t  Literary  Digest.  65  : 142-7.   My.  22,  '20.  How  a  sales  tax  would/ 

work  out. 
Literary  Digest.  65  : 158.  Ap.  17,  '20.    A  banker's  suggestions  for 

better  taxes. 
Manufacturers'  News.    Jl.  16,  '21.     Strong  plea  for  an  equitable 

sales  tax.     F.  J.  Moss. 
Mining  Congress  Journal.    7  : 207-12.    Je.  '21.    General  sales  tax ./ 

is  inevitable:  why  not  now?     Reed  Smoot. 
fMonthly  Bulletin  of  the  Chamber  of  Commerce  of  the  State  of    / 

New  York.     12  : 37-46.     Ja.  '21.    The  sales  tax  a  success  in  * 

the  Philippines.     Can  it  be  made  successful  here?     John  S. 

Hord. 
Outlook.    125  : 406-8.    Jl.  14,  '20.    Painless  taxation.    A  possible    / 

substitute  for  the  income  tax.    Theodore  H.  Price. 
Outlook.      126  :  191-3.      S.    29,    '20.      Painless    taxation.      Is    an 

employer's  privilege  tax  practicable?     Theodore  H.  Price.   S 
*  Review  of  Reviews.   63  : 57-60.   Ja.  '21.    Why  not  a  sales  tax.  ^ 

Jules  S.  Bache. 
Review  of   Reviews.     63  1202.     F.  '21.     The  sales  tax  in  the  S 

Philippines. 


TAXATION  65 

NEGATIVE  REFERENCES 
Books  and  Pamphlets 

*Adams,  Thomas  S.     Needed  tax  reform  in  the  United  States.  ^ 
New  York  Evening  Post.  1920. 

Chamber  of  Commerce  of  the  United  States.     Report  of  the  "" 
special   committee  on  taxation. 

National  Industrial  Conference  Board.    Proceedings  of  the  (first) 
national  industrial  tax  conference  at  Chicago,  111.     Ap.   16,  *" 
1920.     Special   report  no.  9.     1920.     pamphlet.     H3p. 

National    Industrial    Conference    Board.      Proceedings    of    the 
second  national  industrial  tax  conference.     New  York  city.^ 
Oct.  22-3,  1920.    1920.    Special  report  no.  17.    pamphlet.    2OOp. 

*National  Industrial  Conference  Board.    Report  of  the  Tax  com- 
mittee of  the  National  Industrial  Conference  Board  on  the<^"' 
federal  tax  problem.    Special  report' no.  18.    D.  1920.  pamphlet. 
58p. 

National  Tax  Association.     Twelfth   (1919)    annual  conference. 
Proceedings.     1920. 
p.  312-13.     General   sales   tax.     Thomas    S.    Adams. 

Periodicals 

*  Administration.     I  1491-503.     Ap.  '21.     Why  not  a  sales  tax?*^ 

Walter  A.  Staub. 
*Am'erican   Federationist.     28  :  495-7.     Je.   '21.'     Sales   tax, — an  ^ 

iniquitous    proposal.      Samuel    Gompers. 
*Annals  of  the  American  Academy.    97  :  67-75.    S.  '21.    Taxation  ^ 

that  will  not  impair  business.    Clyde  L.  King. 
Bulletin  of  the  National  Tax  Association.     6  : 270-5.     Je.   '21.  ^ 

The  case  against  the  sales  tax.     Fred  R.  Fairchild. 
"Congressional  Record.    60  : 2463-75.     Ta.  31.  '21.     A  war  sales 

tax  during  peace.     Hon.  James  A.  Frear. 
Congressional    Record.     61  : 4443-5.    Jl.    21,    '21.      Remarks    of  ^ 

William  Williamson. 
Congressional  Record.  61  : 6974.  O.  II,  '21.    Remarks  of  Senator ^ 

Irving  L.  Lenroot. 
Economic  Journal.    27  :  1-15.    Mr.  '17.    A  conscription  of  income 

a  sound  basis  for  war  finance.    O.  M.  W.  Sprague. 
Independent.     90  : 487.     Je.    16,   '17.     Taxation   sound   and  un-  -^ 

sound. 


66  SELECTED  ARTICLES 

Mining  Congress   Journal.     7  :  129-31.     Ap.   '21.     Problems   of 

Congress  in  the  revision  of  the  revenue  laws.     Hon.  James 

A.  Frear. 
Mining  Congress  Journal.     7  : 207-12.     Je.   '21.     General   sales  ^/ 

tax:  its  disadvantages  outweigh  its  virtues.     H.  B.  Fernald. 
Nation.    108  :  316-17.    Mr.  i,  '19.    The  new  revenue  act.    Thomas/ 

S.  Adams. 

Nation.     112:683.     My.    u,    '21.     The    undesirable    sales   taxX 
*Nation.     113  :  315.    S.  21,  '21.    Where  is  the  tax  burden  going?  S 

Whidden  Graham. 
Nation.    113  : 350.   S.  28,  '21.  The  vicious  sales  tax.    J.  P.  War-^ 

basse. 
New  Republic,     n  .'300-1.    Jl.  14,  '17.    Conscription  of  income 

once  more.     O.  M.  W.  Sprague. 
*New   Republic.     22:304-5.     My.   5,   '20.     Substitutes   for  the/ 

profits  tax. 

Public.     21  :  721-2.     Je.  8,   '18.     Publicity   for  incomes. 
Review  of   Reviews.     63  : 53-7.     Ja.   '21.     Treasury's  plan   for 

federal  taxes.     David  F.  Houston. 

Taxation.     I  :  21-2.     F.  '20.     Discrimination  against  the  poor."7 
Taxation.     I  :  27-8.    F.  '20.     Mr.  Kahn  points  the  way. 
World's   Work.     43  :  103-7.     N.    '21.     Taxes— which   and   why/ 

David  F.  Houston. 


INTRODUCTION 

The  first  and  most  important  of  the  maxims  with  regard  to 
taxation  that  were  laid  down  by  Adam  Smith  almost  one  hundred 
fifty  years  ago,  that  taxes  should  be  apportioned  among  people 
in  proportion  to  their  ability  to  pay,  is  a  rule  that  has  been 
accepted  by  almost  all  the  best  authorities  who  have  written 
upon  the  subject  since  that  time,  but  it  is  a  rule,  so  far  as  our 
federal  government  is  concerned,  that  has  been  "more  honored 
in  the  breach  than  the  observance."  From  the  adoption  of 
the  federal  constitution  until  after  the  United  States  entered 
the  great  war  our  national  government  was  supported  almost 
entirely  by  funds  collected  by  means  of  the  tariff  or  customs  taxes 
and  by  the  internal  revenue  or  excise  taxes  together  with  the 
earnings  of  the  post  office,  all  of  which  are  consumption  taxes, 
that  is,  taxes  upon  people  not  in  proportion  to  their  ability  to 
pay,  but  in  proportion  to  their  needs,  in  proportion  to  what  they 
eat,  drink,  wear,  and  use.  It  was  only  under  the  stress  of  war 
necessity  that  this  policy  was  changed  by  the  adoption  of  the 
excess  profits  tax  and  the  higher  surtaxes  on  income  and  the 
federal  goverment  began  to  collect  any  considerable  part  of  its 
income  from  taxes  that  fell  upon  the  people  in  proportion  to 
their  ability  to  pay. 

We  are  told  in  the  Eleventh  Report  of  the  Michigan  Board 
of  State  Tax  Commissioners  and  State  Board  of  Assessors 
(1920.  p.  25-26)  that  the  history  of  taxation  and  of  attempted 
tax  reforms  is  a  record  of  a  continuous  struggle  between 
different  economic  classes  of  society  to  shift  to  another  class 
the  burden  of  taxation.  In  the  earlier  days  these  struggles  were 
often  attended  with  violence  and  bloodshed,  but  now  they  are 
fought  out  at  the  polls,  in  the  committee  room,  and  in  the  legisla- 
tive halls  where  the  weapons  are  chiefly  oratory,  literature, 
lobbies,  and  organized  propaganda.  In  the  proposition  to  repeal 
the  excess  profits  tax  and  very  greatly  to  reduce  the  higher 
surtaxes  on  incomes  and  to  adopt  in  lieu  thereof  a  general  sales 
or  turnover  tax,  we  have  a  concrete  example  of  this  struggle 
between  classes.  It  is  the  old  controversy  merely  in  a  different 
form.  Here  the  issue  between  classes  is  squarely  joined. 


68  SELECTED   ARTICLES 

It  is  not  so  one-sided  a  question  as  one  might  be  inclined  to 
think  at  first  glance,  and  a  middle  ground  may  be  the  wisest 
course.  The  surtaxes  on  incomes  were  higher  in  the  United 
States  in  1920  than  anywhere  else  in  the  world.  Able  and  public 
spirited  business  men  declare  that  the  excess  profits  tax,  with 
the  other  heavy  tax  burdens  on  business,  is  killing  industry. 
They  say  that  vast  sums  have  been  driven  into  tax  exempt 
securities  which  otherwise  would  have  gone  back  into  the  chan- 
nels of  industry  to  develop  and  expand  industrial  undertakings. 
This,  they  claim,  is  at  least  a  contributing  cause  of  the  present 
industrial  depression.  Certain  it  is  that  the  revenue  that  the 
federal  government  has  derived  from  the  excess  profits  tax  and 
from  the  income  tax  was  considerably  smaller  in  1921  than  it 
was  in  1920.  Whatever  may  have  been  the  injustice  and  the 
unfairness  of  the  extensive  use  of  consumption  taxes  by  the 
federal  government  during  the  first  century  and  a  quarter  of  its 
existence,  still  the  fact  remains  that  in  1920  it  collected  less  than 
one-quarter  of  its  income  by  such  forms  of  taxation. 

Taxation  will  be  a  great  national  problem  for  years,  possibly 
for  generations  to  come.  It  is  a  problem  that  deserves  far  more 
thought  and  attention  by  the  people  generally  than  it  has 
received  in  the  past.  It  was  less  than  forty  years  ago  that 
Francis  A.  Walker  commented  upon  the  dearth  of  literature  of 
taxation  in  the  English  language.  While,  most  fortunately,  this 
condition  is  no  longer  true,  still  almost  any  librarian  will  now 
say  that  among  the  books  in  his  library  that  are  least  used  are 
those  on  taxation.  Were  this  not  so  we  should  hardly  expect 
to  hear  a  distinguished  champion  of  the  sales  tax  support  his 
cause  with  any  such  obvious  sophistry  as,  "It  rests  fairly  as 
between  citizens.  The  one  who  consumes  the  most  and  spends 
the  most,  pays  the  most  in  taxes."  So  unfamiliar  are  many 
people  with  the  facts  and  the  literature  of  taxation  that  some 
may  fail  to  realize  how  absolutely  untrue  and  ridiculously  absurd 
the  above  statement  is.  In  a  brief,  general,  and  very  elementary 
discussion  of  taxation  written  more  than  twenty-five  years  ago 
Dr.  Frank  S.  Hoffman  said  (The  Sphere  of  the  State,  p.  120) 
"Ought  what  a  person  consumes  to  determine  the  portion  that 
he  should  contribute  to  the  support  of  the  government?  .  .  . 
The  man  with  millions  and  few  personal  expenses  might  often 
by  this  arrangement  contribute  less  to  the  support  of  the 
government  than  a  day  laborer  with  a  large  family  who  possessed 
almost  nothing.  .  .  It  can  hardly  be  doubted  that  our  national 


TAXATION  69 

taxes  upon  salt,  coal,  clothing,  and  the  materials  used  in  the 
construction  of  dwellings,  violate  the  very  first  principles  of 
justice  and  economics.  .  .  The  expenditure  system,  or  tax  on 
consumption,  oppresses  the  working  classes,  obliging  them  to 
pay  not  only  their  own  taxes  but  a  large  proportion  of  the  taxes 
of  others." 

The  younger  student  must  not  be  misled  by  the  oft-repeated 
phrases  of  "taxing  tobacco"  or  "taxing  sugar."  Any  govern- 
ment can  tax  only  its  citizens.  All  taxes  are  paid  by  people. 
It  may  be  that  the  different  people  pay  their  taxes  in  proportion 
to  the  amount  of  sugar  and  tobacco  they  consume,  but  the  taxes 
are  paid  by  people  and  not  by  tobacco  or  sugar.  The  problems 
of  taxation  are  only  to  determine  in  what  proportion,  on  what 
basis,  and  by  what  method  the  government  shall  assess  taxes  upon 
its  people. 


AFFIRMATIVE  DISCUSSION 

WHY  NOT  A  SALES  TAX  x 

A  discussion  of  the  gross  sales  or  turnover  tax,  which  is 
confined  alone  to  that  tax,  is  futile  in  helping  to  reach  a  conclu- 
sion as  to  its  availability. 

While  it  is  essential  that  the  advocate  of  that  tax  should 
first  refute  as  far  as  it  is  in  his  power  the  objections  raised 
by  its  opponents,  he  should  above  all  endeavor  to  show  the 
greater  objections  to  each  of  the  other  taxes,  and  thus,  by  the 
process  of  elimination,  endeavor  to  prove  that  the  turnover 
tax,  while  by  no  means  ideal,  is  the  one  against  which  the 
fewest  objections  can  be  raised. 

Idealism  and  taxation  are  about  as  great  antitheses  as  one 
can  find.  Taxes  must  be  viewed  in  the  light  of  necessary  evils, 
and,  while  it  may  be  permitted  to  drift  on  ideals,  hard,  practical, 
common  sense  must  be  used  in  handling  evils. 

As  I  participate  in  discussion  after  discussion  on  the  subject 
of  the  turnover  tax,  I  find  two  fundamental  criticisms,  and 
practically  only  two. 

I  have  searched  in  vain  through  the  writings  of  Professor 
Adams,  of  Yale  University,  the  leader  in  the  opposition  to  this 
form  of  taxation,  for  any  other  objections  on  which  to  center 
an  argument,  but  they  are  all  so  easily  refuted  that  in  most  of 
his  addresses  he  refutes  them  himself. 

The  two  objections  which  I  say  are  fundamental  are,  first, 
the  question  as  to  whether  the  tax  can  be  passed  on,  otherwise 
making  it  a  tax  on  gross  income,  and,  second,  the  further 
question  as  to  whether  it  will  result,  as  Professor  Adams  claims, 
in  monopolizing  the  movements  of  an  article  in  the  processes 
of  its  manufacture,  giving  the  self-contained  business  a 
prejudicial  advantage,  thus  leading  to  the  elimination  of  the 
middle  man. 

1  By  Jules    S.  Bache.    Review  of  Reviews.    63:57-60.    January,   1921. 


72  SELECTED   ARTICLES 

Minor  Objections 

There  are  many  criticisms  which  I  deem  hardly  of  sufficient 
importance  to  mention  more  than  casually.  Among  them  are: 

1.  That  if  the  tax  is  shifted,  as  it  must  be,  it  would  be  a  tax 
against  the   living  wage. 

I  contend  that  this  is  far  less  likely  in  a  general  sales  tax 
than  in  the  proposition  of  specifically  taxing  sugar,  coffee,  tea, 
etc.,  making  the  tax  identical,  on  the  cheap  article,  with  that 
upon  the  dear  article,  and  in  the  case  of  the  already  existing 
taxes,  of  the  specific  levy  on  about  fifty  different  kinds  of 
business  in  which  the  tax  is  unquestionably  against  the  living 
wage. 

Even  if  it  could  be  construed  that  the  general  sales  tax 
might  rest  to  some  extent  in  greater  effect  upon  the  small  wage- 
earner,  that  can  be  more  than  offset  by  raising  the  income  tax 
exemption  to  $5000. 

2.  That  the  tax  will  be  loaded. 

I  think  the  basis  for  this  assertion  is  in  the  fact  that  the 
present  excess  profits  taxes  are  undoubtedly  being  loaded,  and 
overloaded,  as  they  are  passed  along,  but  this  is  because  of  the 
uncertainty  of  these  taxes.  There  would  be  no  such  uncertainty 
in  the  sales  tax.  It  is  true  that  the  business  dealing  in  a 
multiplicity  of  articles  and  finding  it  impossible  to  pass  the 
fractional  amount  on,  which  a  I  per  cent  tax  would  call  for,  on 
any  one  of  the  articles,  might  seek  compensation  for  the  loss, 
in  loading  the  small  difference  on  to  some  other  one  of  its 
numerous  lines.  The  infinitesimal  fraction  which  I  per  cent  on 
a  cheap  thimble  might  call  for,  might  be  added  to  the  fraction 
on  some  other  similar  article,  in  order  that  the  firm  may 
recover  from  the  ultimate-consumer  its  complete  overhead,  as 
called  for  by  this  tax. 

3.  That  the  amount  which  such  a  tax  would  produce  cannot 
be  calculated. 

This  I  will  admit  only  partially;  but  it  is  not  a  good  objection, 
since  one  year's  .application  would  prove  it  completely,  and  even 
though  it  is  admittedly  difficult  to  calculate  what  such  a  tax 
would  produce,  there  are  bases  on  which  to  found  calculations, 
viz.: 

France  has  a  population  of  about  one-third  that  of  the  United 
States,  and  a  much  more  thrifty  population.  In  its  calculations, 
upon  which  the  I  per  cent  turnover  tax  was  based,  the  fiscal 


TAXATION  73 

authorities  counted  upon  the  tax  producing  $1,000,000,000.  In 
practise,  since  July  I,  when  the  tax  began  to  operate  (and  all 
taxation  experts  admit  that  in  its  initial  stages  no  tax  produces 
full  returns),  the  collections  have  been  satisfactory,  and  the 
French  Commission  here  expects  that  it  will  bring  returns  fully 
up  to  the  estimate ;  and  on  that  basis,  and  without  allowing 
for  the  increased  proportionate  expenditures  of  our  population 
in  comparison  with  those  of  France,  we  would  raise  $3,000,000,000. 

Taking  the  latter  element  into  consideration  would  give  some 
color  to  the  objections  that  the  yield  of  the  tax  would  probably 
be  considerably  in  excess  of  the  amount  estimated.  I  have 
never  found  taxing  authorities  objecting  to  a  tax  which  yields 
more  than  is  calculated;  but  if  it  should  do  so  in  this  instance, 
the  rate  can  promptly  be  reduced,  and  the  temporary  excess 
used  for  a  decrease  of  the  national  debt. 

Expert  estimates  have  varied  all  the  way  from  $3,000,000,000 
to  $7,000,000,000,  but  one  of  the  leading  members  of  the  Finance 
Committee  of  the  Senate,  who  has  been  in  touch  with  this 
movement  ever  since  its  inception,  has  stated  that  he  is  prepared 
to  go  on  record  with  the  prediction  that  this  tax  will  net  very 
close  to  $4,500,000,000  in  its  initial  application. 

4.  Administrative   difficulties. 

Professor  Adams,  in  his  recent  speech  before  the  Economic 
Club  of  New  York  City,  drew  particular  attention  to  the  fact 
that  the  tax  bureaus  in  Washington  were  on  the  verge  of  a 
breakdown.  I  consider  this  one  of  the  strongest  arguments  in 
favor  of  a  simple,  automatically  collectible  tax,  such  as  this 
one,  which  will,  in  my  opinion,  and  in  the  opinion  of  those  who 
have  studied  the  situation,  furnish  material  relief  to  the  burdens 
in  Washington.  But  at  all  events,  objection  should  hardly  be 
raised  to  a  tax  which  will  relieve  the  mental  and  manual  labor 
required  for  the  collection  of  taxes  by  an  administration  em- 
ploying as  many  as  seven  hundred  thousand  functionaries. 

The  staff  now  being  employed  on  the  excess  profits  tax 
and  on  fifty-five  individual  and  different  sales  taxes,  would  be 
found  to  be  far  in  excess  of  that  required  to  collect  a  simple 
and  automatic  turnover  tax. 

5.  That    the    attempt    to    institute    this    tax    would    lead    to 
opposition   from   the   man   in   the   street. 

I  believe  that  this  is  merely  a  question  of  education.  The 
American  laboring  man,  farmer,  and  business  man  is  essentially 


74  SELECTED    ARTICLES 

fair-minded,  and,  while  it  is  a  natural  tendency  (not  peculiar 
to  the  inhabitant  of  the  United  States)  to  unload  one's  burdens 
on  one's  neighbor,  I  believe  that  the  average  American  is  less 
inclined  to  do  this  than  the  citizen  of  most  natiens.  But  while 
with  little  difficulty  it  can  be  shewn  that  no  one's  burdens  are 
in  any  way  lightened  by  the  present  system  or  other  mooted 
systems,  the  great  majority  of  the  business  world  of  this  country 
would  have  its  burdens  almost  entirely  lifted  by  the  initiation 
of  this  form  of  taxation,  and  enthusiastic  approval  could  be 
enlisted. 

I  have  had  a  recent  expression  from  a  power  in  the  farming 
world  that  it  would  take  very  little  general  information  to  the 
farming  community  of  the  United  States  to  put  them  solidly 
behind  this  tax.  The  very  agitation  for  a  specific  tax  of  2c.  on 
coffee  and  sugar,  and  loc.  on  tea  and  gasoline,  would,  I  believe, 
prove  educating  to  the  farmer;  and  when  we  stop  to  consider 
that  the  political  opposition  is  dwelt  upon  as  an  argument  against  t 
the  tax  by  the  very  people  who  recommend  these  specific  taxes 
on  sugar,  coffee,  tea,  and  gasoline,  it  is,  to  say  the  least, 
amusing. 

I  believe  that  a  tax  so  equally  divided  that  every  man,  in 
proportion  to  his  station  in  the  community,  would  shoulder  his 
share  of  it,  would  become  quite  popular,  if  that  fact  were  used 
as  an  argument  against  it. 

Fundamental  Objections  Answered 

This  brings  me  back  to  the  discussion  of  the  two  fundamental 
objections  already  mentioned,  viz.:  (i)  Doubt  as  to  whether  it 
can  be  passed  on;  and,  (2)  Giving  an  unfair  advantage  to 
businesses  which  combine  the  processes  of  manufacture  of  an 
article  over  those  which  are  engaged  in  only  one  or  two  of  those 
processes. 

I  believe  the  turnover  tax  will  ultimately  be  looked  upon 
as  an  overhead  charge,  pure  and  simple.  In  passing  it  on  it 
must  be  treated  in  the  same  manner  as  any  other  overhead 
charge,  such  as  rent,  labor,  and  kindred  items.  In  times  of 
falling  prices  it  is  possible  that  none  of  these  charges  can  be 
passed  on.  The  tax  would  share  the  same  fate. 

Business  must  be  visualized  as  being  conducted  for  profit. 
Times  of  loss  must  necessarily  be  the  exceptions,  or  no  business 
concern  would  remain  solvent;  and  in  times  of  profit  all  over- 


TAXATION  75 

head  is  passed  on.  Some  overhead  is  passed  on  in  an  exagger- 
ated form.  This  tax  never  should  be.  It  can  be  too  easily 
calculated.  Rent  and  labor  may  be  an  unknown  quantity  to  the 
purchaser  of  the  goods,  but  this  tax  will  be  a  known  quantity. 
Its  amount  can  be  specifically  stated  at  the  bottom  of  a  bill. 
It  will  be  so  small  when  so  stated,  in  proportion  to  the  amount 
of  the  bill,  that  it  will  hardly  cause  any  irritation.  The  practice 
of  specifically  charging  it  in  a  bill  would  make  it  a  habit,  and 
we  are  decidedly  a  people  of  habit.  The  first  straphanger  in  a 
street  car  was  surely  a  disgruntled  individual.  Straphanging 
has  become  a  habit. 

If,  f«r  any  reason,  the  tax  cannot  be  passed  on  (and  no  one 
has  as  yet  voiced  any  particular  instance  where  that  reason 
exists)  it  should  not  be  allowed  to  apply.  I  believe  that  this 
latter  policy  should  be  a  basic  element  in  any  provision  for  this 
tax. 

As  to  the  other  objection,  viz.:  That  it  will  lead  to  monopoly 
in  business  by  the  elimination  of  the  middle  man,  I  consider 
this  entirely  specious. 

The  United  States  Steel  Corporation  has  never  been  attacked 
for  the  reason  that  it  controlled  in  their  entirety  the  movements 
of  iron  ore  from  the  mine  to  the  delivery  of  the  finished  steel 
into  the  hands  of  the  consumer,  but  because  it  was  accused  of 
monopolizing  the  volume  of  the  output.  Such  competition  as 
it  has  had,  has  hardly  been  eliminated  under  proper  management, 
by  its  controlling  the  various  movements  of  the  product.  But 
should  the  tax  result  in  business  being  more  self-contained  (and 
public  policy  requires  protection  for  the  middle  man),  it  would  be 
a  very  simple  and  elementary  change  to  double  the  tax  on  the 
turnover  of  such  companies  as  chain  stores  which  manufacture 
their  own  articles,  and  catalogue  mail-order  houses;  and  as  the 
average  tax  levied  on  articles  which  pass  through  several  move- 
ments before  they  reach  the  consumer  will  not  be  over  2%  per 
cent,  a  doubling  of  the  tax  to  2  per  cent  on  such  business  would 
more  than  protect  the  middle  man,  if  he  needed  protection,  which 
I  venture  to  doubt. 

The  tendency  of  modern  business  development  has  been 
toward  reduction  of  the  cost  of  distribution.  If,  in  the  course 
of  that  tendency,  it  has  been  found  that  the  cost  of  distribution 
is  reduced  by  business  being  more  self-contained,  viz:  by 
corporations  handling  the  various  movements  of  the  article 


76  SELECTED   ARTICLES 

themselves,  no  sympathy  for  the  middle  man  has  prevented  this 
movement. 

The  cotton  mill  which  does  its  own  purchasing  of  raw 
material,  the  weaving  of  the  yarn,  and  the  dyeing  of  same,  and 
which  in  the  past  had  only  purchased  the  yarn  and  manufactured 
its  product,  has  not  been  attacked  by  anyone  for  eliminating 
one  or  two  middle  men  by  its  becoming  more  self-contained. 
The  silk  mill  which  buys  its  raw  silk  in  Japan,  throws  and 
dyes  it,  and  spins  its  thread,  has  not  been  attacked  on  that 
ground. 

The  ultimate  tendency  will  be  for  all  business  to  become 
more  self-contained.  If  this  tax  should  hasten  the  process,  it 
would  only  prove  that  the  tax  is  operating  in  the  spirit  of 
the  times. 

The  basis  of  world  unrest  lies  in  the  burdens  of  taxation. 
Foreign  news  which  we  get  from  the  press  is  full  of  suggestions 
being  followed  by  the  finance  ministers  of  the  various  nations 
for  new  kinds  of  taxation. 

The  income  tax,  which  theorists  have  claimed  was  the  ideal 
method  of  raising  large  sums,  has  been  worked  until  it  has 
obtained  a  strangle-hold  upon  all  initiative  and  the  limits  of 
national  solvency. 

The  capital  tax  is  but  another  kind  of  income  tax,  which  in 
its  results  means  a  steady  reduction  of  the  return  from  the 
income  tax.  The  sales  tax  would  go  on  uninterruptedly  forever, 
without  injuring  the  capital  from  which  it  was  drawn,  and 
would  hardly  fluctuate  more  than  an  average  of  10  per  cent  per 
annum  in  its  yield.  It  would  grow  with  the  growth  of  the 
world.  It  would  become  less  and  less  of  a  burden  as  its  results 
grew. 

If  all  nations  were  to  adopt  it  it  would  put  them  on  an  equal 
footing  in  attracting  constructive  immigration.  A  tendency  is 
already  evident  of  nations  desiring  to  attract  immigration, 
announcing  as  a  policy  the  abandonment  of  the  income  tax. 
Mexico  has  already  made  this  announcement.  So  have  some 
South  American  countries. 

People  with  confidence  in  the  success  of  their  futures  will 
hardly  choose  as  the  field  of  their  activities  a  country  levying 
large  percentages  on  the  results  of  the  individual  efforts.  I 
believe  that  in  time  the  income  tax  in  its  present  form  will  be 
abandoned  by  all  nations.  Will  this  country  lead  the  world  in 


TAXATION  77 

this,  as  it  has  in  many  other  progressive  movements,  or  will  it 
wait  and  follow  when  it  is  compelled  to?  This  is  the  problem 
which  the  business  man  must  help  in  solving,  since  I  believe 
that  it  is  only  by  the  growing  popular  demand  for  the  application 
of  this  tax  that  our  legislators  will  be  forced  to  adopt  it. 

Advantages  Summarised 

In  conclusion,  I  would  reiterate  the  nineteen  points  under 
which  I  have  already  summed  up  the  advantages  of  this  tax. 
Where  is  the  opponent  of  this  tax  who  can  give  us  as  many 
advantages  for  any  other  form  of  taxation?  And,  above  all, 
for  any  other  tax  which  can  be  counted  upon  to  raise  such  a 
large  percentage  of  the  financial  requirements  of  our  govern- 
ment? 

These  points  are  as  follows: 

1.  It   is  a   complete   change   from   the   present   system   and 
meets  all  the  objections  to  prevailing  methods. 

2.  It   is    simple   where   the   present    system   is   distressingly 
complicated. 

3.  It  will  produce  ample  revenue,  whereas  the  taxes  now 
imposed,   as  profits   and  incomes   decline,   must   fall   far  below 
amounts   required. 

4.  Under  the  sales  tax  government  revenue  is  based  upon 
something  tangible,  namely,  the  expenditures  of  the  people,  whicl 

go  on  unceasingly  and  do  not  vary  in  hard  times  or  good  times\     . 
to  such  an  extent  as  seriously  to  affect  the  revenue. 

5.  It  willstop  capital  from  hiding  in  tax-exempt  securities. 

6.  It  allows  the  country  to  save   funds    for   future   indus- 
trial   expansion. 

7.  It    will    restore    competition,    enterprise,    and    individual 
initiative,  now  smothered  to  death  by  the  pursuit  of  the  tax- 
gatherer. 

8.  It  will  encourage  business  thrift,  stopping  the  waste  of 
high  salaries  and  extravagances,  which  can  then  no  longer  be 
charged  off  against  taxes. 

9.  Its  collection  is  simple  and  automatic  for  both  the  govern-' 
ment  and  the  taxpayer. 

10.  It  is  fair  in  its  distribution.    The  one  who  consumes  thev/ 
most  and  spends  the  most  pays  the  most  in  taxes. 

11.  It  will  not  increase  the  price  of  commodities  beyond  an 
average   of  2%    per   cent,   whereas   now   taxes   increase   prices  / 
nearly  25  per  cent. 


imes\     . 

ities.  jfyj(  i^U;  0. 
dus-  &  /3^*fo  *$ 


78  SELECTED   ARTICLES 

12.  Consequently,  it  will  tend  to  reduce  present  prices  to  a 
marked  degree. 

13.  It  has  been  in  successful  operation  in  the  Philippines  for 
years   and  has  proved  in   every  way  satisfactory. 

^  14.     It  has  recently  been  put  into  operation  in  France,  and 
is  thus   far   strikingly  successful. 

15.  Some  forms  of  it  are  in  operation  in  Canada,  and  it  is 
so  satisfactory  that  leading  interests  there  are  urging  that  it  be 
adopted  as  a  complete  substitute  for  all  other  taxes. 

16.  It  is  based  on  sound  democratic  principles  and,  by  reach- 
ing  out   into   new   sources   of   revenue,    spreads   the   tax   load 
equitably  and  in  a  way  most  easily  borne  by  all. 

17.  As  it  will  be  passed  along  to  the  consumer,  millions  of 
people  will  pay  the  tax,  but  nobody  will  know  it  or  feel  it.v// 

18.  It  enables  every  taxpayer  to  know  his  tax  liability.*' 

19.  It  is   surer  in   its   incidence,  Ampler  in   fts   application) . 
more  productive  in   results,  more  economical  in  its  collection, 
and  less  of  a  burden  upon  everybody  than  any  other  known 
form  of  taxation. 


WHY  A  SALES  TAX?1 

There  is  a  great  deal  of  underbrush  to  be  cleared  away 
before  the  outlines  of  a  sound  and  sane  overturn  sales  tax  can 
be  clearly  discerned.  The  advocates  of  a  sales  tax  do  not, 
unfortunately,  all  talk  the  same  language,  and  the  opponents 
of  any  uniform  overturn  tax  joyfully  jumble  all  the  divergent 
views  advanced  into  a  straw-man  of  their  own  conception  and 
then  proceed  to  try  to  set  it  on  fire.  But  it  won't  burn.  Part 
of  it  is  non-inflammable.  This  non-inflammable  material  in 
the  straw-man  is  the  suggestion  for  a  tax  at  each  step  in  the 
sale  of  commodities  by  any  one  to  any  one. 

By  commodities  I  mean  just  what  the  dictionary  says — 
"goods,  wares,  merchandise,  produce  of  land,  and  manufactures." 

By  a  tax  at  each  step  in  the  sale  of  commodities,  I  do  not 
mean  a  tax  on  the  gross  receipts  of  everybody  engaged  in  any 
activity.  I  mean  a  tax  so  levied  that  the  vendor  of  commodities 
shall  become  the  collector  of  a  tax  measured  by  the  price  agreed 

1  By  B.  S.  Orcutt.     Administration.     1:659-66.    May,  1921. 


TAXATION  79 

upon  with  the  purchaser,  and  compulsorily  passed  on  to  the 
purchaser  by  means  of  a  special  charge,  as  a  tax,  specifically 
billed  as  such,  on  the  invoice  to  the  purchaser. 

To  approach  the  situation  right  in  the  middle,  I  mean  that 
if  John  Smith  is  a  manufacturer  of  overalls,  he  must  buy  his 
cloth,  his  thread,  his  buttons,  his  buckles,  his  drill,  from  various 
people  who  manufacture  these  things.  He  buys  one  thousand 
yards  of  denim  from  John  Doe  at  3oc.  a  yard.  The  bill  is  $300 
plus,  at  i  per  cent,  $3  tax  collected  from  Smith  by  Doe  and 
turned  over  to  the  government  by  Doe.  He  buys  ten  gross  of 
buttons  from  John  Jones  for  $8.  The  bill  is  $8  plus  $.08  tax. 
He  buys  from  John  White  a  gross  of  buckles  for  $2.  The  bill 
is  $2  plus  $.02  tax.  He  buys  from  John  Green  ten  spools  of 
pocket  drill  for  $15.  The  bill  is  $15  plus  $.15  tax.  He  buys 
from  John  Brown  ten  spools  of  thread  for  $7.  The  bill  is  $7 
plus  $.07  tax. 

The  total  cost  of  material  for  a  gross  of  overalls  is  then 
$335-32»  °f  which  $332  is  the  invoiced  cost  of  material  and  $3.32 
is  the  invoiced  tax  collected  by  the  vendors  of  cloth,  thread, 
buttons,  buckles  and  drill,  and  turned  over  to  the  government. 

John  Smith  goes  about  his  business  of  manufacture  in  the 
confidence  that  he  bought  this  material  at  the  best  possible  price 
and  that  every  competitor  has  paid  the  same  tax  rate  on  material. 
Smith  sells  his  gross  of  overalls  for  $864,  or  $6  each.  He  bills 
the  overalls  to  the  retailer  at  $864  plus  $8.64,  or  a  total  of 
$872.64,  of  which  Smith  acts  as  government  collector  of  $8.64. 

The  tax  on  Smith  has  been  $3.32,  if  there  was  any  tax  at  all. 
It  has  been  a  consumption  tax  pure  and  simple,  measured  by 
the  amount  of  his  purchases,  not  of  his  sales.  Every  competitor 
has  been  obliged  to  pay  approximately  the  same  tax,  varied 
slightly  by  his  skill  or  luck  in  buying.  The  tax  has  gone  into 
the  cost  of  goods,  just  as  has  labor,  freight  and  overhead. 
Smith  and  his  competitors  have  each  been  obliged  to  make  their 
sales  price  irrespective  of  their  obligations  to  collect  a  tax,  and 
what  they  do  collect  goes  to  the  government  and  is  not  a 
percentage  paid  by  them  on  their  gross  receipts. 

Before  the  materials  got  to  Smith  a  similar  tax  was  paid  on 
previous  processes,  and  was  all  included  in  the  $3.32  that  Smith 
paid.  When  the  manufactured  product  leaves  Smith,  the  retailer 
pays  the  tax  of  $8.64,  or  $.06  on  each  garment.  When  the 


8o  SELECTED   ARTICLES 

retailer  sells  to  the  poor,  downtrodden  laboring  man  at  $8  a 
garment,  the  tax  becomes  $.08.  It  doesn't  interest  me  particularly 
whether  the  retailer  collects  the  $.08  tax  from  the  eventual 
consumer  or  absorbs  it  himself.  My  object  is  to  make  it  a 
consumption  tax  all  the  way  down  to  the  retailer,  and  to  con- 
sider it  nothing  but  a  consumption  tax. 

The  words  "consumption  tax"  sound  fearsome  to  the  pol- 
itician, who  still  talks  glibly  about  the  tariff.  The  tariff  tax  is 
a  consumption  tax  pure  and  simple  when  applied  to  articles 
not  produced  in  this  country.  It  is,  like  the  excess  profits  tax, 
a  consumption  tax  plus,  when  applied  to  articles  that  are  pro- 
duced in  this  country.  All  the  present  miscellaneous  sales  taxes 
are  consumption  taxes.  I  tried  to  explain  to  a  correspondent 
that  tariff  tax  of  IDC.  a  pound  on  coffee  was  a  consumption  tax. 
He  dismissed  my  illustration  with  the,  to  him  sufficient,  answer 
that  "the  tax  on  coffee  is  a  tariff  matter."  Then  he  added: 
"Whether  your  importer  enters  the  amount  of  the  tariff  on 
his  bill  as  a  separate  item  or  includes  it  in  his  gross  price,  is  a 
matter  of  absolutely  no  consequence.  He  will  get  all  the  market 
will  stand  for  his  coffee  in  either  case." 

Precisely,  that  is  exactly  what  I  am  trying  to  get  at.  He 
would  do  the  same  thing  were  there  no  tax,  and  so  would  his 
competitor.  The  element  of  competition  and  price  is  not 
influenced  by  the  tax.  So  with  a  uniform  overturn  tax,  invoiced 
as  such! 

There  "ain't  no  such  animal"  as  a  tax  that  nobody  pays.  A 
proper  consumption  tax  is  a  tax  that  is  passed  on  to  the  final 
consumer  just  exactly  as  it  is  levied,  not  augmented  many  times 
like  the  excess  profits  tax,  and  not  absorbed  by  business  like 
the  imaginary  tax  that  sends  shivers  down  the  spines  of  unduly 
alarmed  middlemen. 

Now  all  this  is  different  from  a  retail  sales  tax  like  the 
present  tax  on  jewelry,  or  luxuries,  or  ice-cream.  It  is  different 
from  a  tax  on  gross  receipts  that  may  be  absorbed  or  pyramided 
at  the  option  of  the  dealer.  It  is  different  from  a  tax  on 
services,  or  on  the  transfer  of  capital  assets.  It  does  not  conflict 
with  the  long  established  special  excise  taxes  on  tobacco  and 
spirits,  with  the  stamp  taxes  on  documents,  or  with  the  income 
tax. 

A  tax  on  overturn  sales  of  commodities  cannot  be  a  direct 


TAXATION  81 

substitute  for  the  excess  profits  tax.  The  two  taxes  are  not 
comparable  except  in  the  one  feature  of  being  an  ultimate  cost 
to  the  consumer,  for  of  course  without  profits  derived  from 
the  consumer,  there  is  no  excess  profits  tax.  Abolition  of  the 
excess  profits  tax  involves  readjustment  of  surtaxes  and  of 
corporate  normal  tax  to  bring  about  equality  between  stock- 
holders. This  is  a  problem  by  itself  that  would  be  just  as  much 
a  problem  were  there  no  other  tax  than  the  income  tax. 

Conversely,  the  clash  between  special  consumption  taxes  and 
a  general  consumption  tax  would  still  exist  were  there  no 
income  tax  and  were  all  revenues  derived  from  consumption 
taxes. 

As  a  matter  of  fact,  practical  considerations  make  necessary 
not  only  an  income  tax  and  a  consumption  tax,  but  also  certain 
privilege  taxes,  which  again  are  in  the  class  by  themselves.  The 
problem  with  respect  to  classes  of  taxation  is  to  make  them 
balance  properly.  Hence,  we  can  discuss  the  principle  of  the 
consumption  tax  without  regard  to  other  classes  of  taxes. 

The  issue  with  respect  to  an  overturn  sales  tax  on  com- 
modities is  an  issue  between  one,  general,  uniform  tax  and  many 
special,  irregular,  unrelated,  confusing,  and  annoying  taxes. 

There  are  now  special  consumption  taxes  on  some  one 
hundred  different  articles,  laid  at  different  rates  and  collected  by 
various  methods.  The  resulting  confusion  is  endless,  the  leakage 
is  unknown,  and  in  many  cases  the  revenue  derived  is  negligible 
and  the  cost  of  collection  excessive.  Some  of  these  taxes  are 
levied  on  the  producer  and  some  on  the  consumer. 

In  the  latter  (the  consumer)  class,  the  vendor  acts  merely 
as  a  collector  for  the  government,  and  equality  is  therefore 
assured  as  between  consumers  of  the  particular  articles  taxed. 
Examples  of  this  tax  are  the  10  per  cent  collected  from  pur- 
chasers of  theatre  tickets,  the  4  per  cent  collected  on  perfumes, 
cosmetics,  patent  medicines,  etc.,  the  10  per  cent  collected  on 
certain  alleged  luxuries,  the  10  per  cent  collected  on  ice-creams; 
etc. 

In  the  former  (the  manufacturer)  class,  the  vendor  pays  the 
tax.  There  is  equality  between  vendors  in  so  far  as  each  must 
pay  a  tax,  but  there  is  nothing  to  show  whether  the  tax  has  been 
passed  on  or  absorbed,  whether  it  has  been  augmented  or 
diminished.  Examples  of  this  class  are  the  5  per  cent  levied  on 


82  SELECTED   ARTICLES 

sales  of  automobiles,  10  per  cent  on  sporting  goods,  3  per  cent 
on  chewing  gum,  100  per  cent  on  brass  knuckles,  5  per  cent  on 
jewelry. 

In  neither  class  is  there  any  rhyme,  reason,  coordination  or 
^guiding  principle  in  the  selection  of  the  articles  taxed  or  in  the 
rate  exacted.  Admittedly,  the  entire  scheme  was  an  emergency 
recourse,  and  is  illogical,  unfair,  absurd,  and  administratively 
chaotic  as  a  permanent  basis  of  taxation.  But  a  little  study  of 
the  practical  application  of  these  taxes  brings  to  light  certain 
principles  that  might  and  should  be  applied  to  all  consumption 
taxes. 

In  practice,  the  dispenser  of  an  ice-cream  soda  sets  a  price 
of  say  I5c.  for  the  article,  and  then  collects  the  tax  of  2c.  from 
the  consumer.  All  consumers  pay  that  2c.  It  does  not  enter 
into  the  overhead  or  the  expense  of  conducting  the  business. 
It  is  a  tax  that  "runs  with  the  goods."  The  element  of 
competition  between  dispensers  is  eliminated  so  far  as  the  tax 
is  concerned.  One  dealer  may  use  a  larger  glass  than  his 
competitor,  or  he  may  use  a  more  expensive  syrup,  or  he  may 
charge  130.  instead  of  I5c.  for  his  concoction,  but  the  tax 
j  remains  constant  at  the  rate  established  by  law.  It  is  paid  with- 
out relation  to  his  income.  The  competition  between  himself 
and  his  neighbor  remains  just  as  it  would  be  were  there  no  tax. 
It  is  questionable  how  much  of  this  tax  gets  to  the  government. 
The  Treasury  Department  doesn't  know.  But  the  consumer 
never  fails  to  pay. 

In  practice  the  automobile  manufacturer  makes  a  price  for 
his  car  f.o.b.  at  the  factory.  To  that  price  he  adds  5  per  cent 
as  the  tax  which  he  then  actually  collects  from  the  purchaser, 
although  in  this  case  the  law  levies  the  tax  on  himself.  He 
adopts  this  procedure  because  it  brings  about  simplicity  and 
equality  in  the  computation  and  collection  of  the  tax,  just  as  if 
the  tax  had  been  levied  on  the  purchaser,  as  was  the  case  with 
the  ice-cream  soda.  He  adjusts  his  price  in  competition  with 
his  rivals.  The  existence  of  the  tax  makes  no  difference  to 
him  as  compared  with  his  competitors  who  adopt  the  same 
practice. 

However,  all  the  manufacturers'  taxes  do  not  work  thus 
simply.  The  manufacturer  of  basketball  shoes  is  taxed  10  per 
cent  if  he  calls  them  basketball  shoes,  but  there  is  no  tax  if  he 
calls  them  "sneakers."  The  manufacturer  of  a  hunting  knife  is 


TAXATION  83 

taxed  10  per  cent  if  he  calls  it  a  hunting-knife.  He  is  not  taxed 
at  all  if  he  calls  it  a  sheath  knife.  The  manufacturer  of  a 
billiard  table  is  taxed  10  per  cent,  but  there  is  no  tax  on  a 
mantlepiece  made  alongside  out  of  the  same  materials.  These 
people  cannot  easily  segregate  the  tax,  and  it  ordinarily  goes 
into  general  cost  to  be  passed  on  or  absorbed  or  guessed  at. 
Then  it  immediately  becomes  a  percentage  on  gross  income. 

The  manufacturer  of  toilet  soaps  is  taxed  3  per  cent  and  the 
manufacturer  of  candy  5  per  cent,  on  sales  prices.  Neither  can 
apportion  this  to  individual  sales  so  it  goes  into  cost  and  becomes 
a  percentage  on  gross  income. 

It  is  right  here  that  the  objection  most  seriously  urged 
against  an  overturn  tax  comes  into  play.  Unless  the  sales  tax 
is  definitely  passed  on  to  the  consumer  it  becomes  a  tax  on 
gross  income  and  is  open  to  the  criticism  that  it  is  unequal  as 
applied  to  net  income.  It  should  always  be  passed  on  to  the 
consumer.  Hence  all  the  arguments  based  on  the  idea  of  relation 
to  net  income  are  waste  motion  so  far  as  the  dealer  is  concerned. 

An  overturn  sales  tax  should  be  distinctly  confined  to  com- 
modities— that  is,  to  goods,  wares,  and  merchandise — and  it 
should  be  frankly  a  consumption  tax  like  the  tax  on  ice-cream, 
theater  tickets,  and  the  so-called  selected  luxuries.  It  should 
always  "follow  the  goods"  by  specific  invoice.  It  could  never 
then  be  inflated  or  have  any  effect  on  competition  any  more  than 
if  it  never  existed. 

Assume  that  all  these  irrationally  unrelated,  irregular,  pesti- 
ferous, specially-selected  excise  taxes  were  wiped  out,  and  a 
general  tax,  of  say  I  per  cent  were  levied  on  all  overturns  from 
the  producer  to  the  consumer,  with  the  special  and  distinct 
proviso  that  the  tax  is  an  addition  to  the  sale  price  and  is  to  be 
so  invoiced  on  the  bill.  How  can  such  a  general  tax  have  any 
influence  on  competition  or  be  inflated  to  consumers  or  work 
any  injustice  as  between  one  producer  and  another  or  as  between 
one  consumer  and  another? 

The  Philippine  overturn  tax  is  so  administered,  the  purchaser 
paying  for  the  stamps  which  are  merely  the  machinery  of  collec-    .    ^ 
tion,  not  by  any  means  necessary.    The  French  tax,  the  Canadian 
tax  and  the  Mexican  tax  are  so  administered.    All  are  perfectly 
simple  and  satisfactory. 

With  compulsory  invoicing  of  the  tax,  all  the  labored  argu- 
ments as  to  percentage  charge  against  net  income  fall  to  the 


84  SELECTED   ARTICLES 

ground  and  the  carefully  worked  out  tables  to  prove  an  imaginary 
point  become  a  joke. 

Nobody  has  the  effrontery  at  any  place  or  any  time  to  say 
that  there  should  be  no  sales  taxes.  The  opponents  of  a 
general  commodities  overturn  tax  not  only  admit  the  necessity 
of  a  sales  tax  in  some  form,  but  they  urge  additions  to  the 
present  long  list  of  special  sales  taxes.  In  the  same  breath 
they  gasp  with  horror  at  the  idea  of  a  consumption  tax;  they 
nearly  strangle  over  the  thought  that  the  consumption  tax  is 
not  a  consumption  tax  at  all  but  a  tax  on  capital;  they  see 
endless  confusion  in  arriving  at  gross  receipts,  and  extreme 
simplicity  in  arriving  at  net  income,  although  net  income  can 
be  derived  only  from  gross  receipts. 

The  very  first  line  on  the  working  schedule  of  every  income 
tax  blank — corporate,  partnership,  individual,  fiduciary — calls  for 
a  statement  of  gross  sales.  The  entire  return  from  any  mer- 
cantile or  manufacturing  operation  is  built  up  on  that  line.  If 
the  result  set  forth  in  that  line  is  wrong,  the  whole  complicated 
structure  that  follows  must  be  wrong.  All  that  is  necessary 
for  the  collection  of  an  overturn  sales  tax  is  that  one  line. 

There  is  no  suggestion  anywhere  to  abolish  the  income  tax. 
The  income  tax  cannot  be  collected  without  that  one  line  on 
the  return.  How  a  dealer  can  so  confuse  his  books  as  to  make 
that  line  false  for  the  overturn  tax  and  fool-proof  for  the 
income  tax  is  entirely  beyond  my  imagination.  The  somewhat 
notorious  report  made  by  the  National  Industrial  Conference 
Board  Tax  Committee  declares  that  under  a  sales  tax  "new  and 
complicated  problems  would  arise  in  the  definition  of  what  is  a 
sale."  I  have  always  been  a  dazed  admirer  of  the  dialectic 
sophistries  with  which  that  National  Industrial  Conference 
Board  Tax  Committee  asphyxiated  itself  so  much  to  its  own 
satisfaction.  I  think  this  particular  gem  of  auto-intoxication  is 
worthy  of  unstinted  admiration.  I  take  off  my  hat  to  the  ac- 
countant who  can  work  out  net  income  from  one  report  of 
gross  sales  and  can  camouflage  those  same  sales  for  purposes 
of  a  sales  tax. 

It  is  unfortunate  that  advocates  of  a  sales  tax  have  allowed 
themselves  at  times  to  display  peevishness.  This  does  not  blind 
me — a  theorist  only — to  the  equal  injustice  of  the  charge  that 
advocates  of  an  overturn  tax  are  those  "whose  knowledge  of 
taxation  is  limited  and  who  are  concerned  solely  in  selfish 


TAXATION  85 

attempts  to  pass  their  burden  on  to  others  less  able  to  pay."  It 
does  not  justify  Congressman  Frear's  accusations  that  because 
Otto  H.  Kahn  "wabbled  and  wavered"  over  the  subject  of  an 
overturn  tax,  his  final  decision  in  its  favor  was  influenced  by 
selfish  motives. 

All  of  the  backbitings  are  unworthy  in  a  discussion  of  a 
big,  elemental,  vital  question  that  concerns  the  welfare  of  every 
resident  of  the  United  States,  and  therefore  of  the  United  States 
itself.  Why  not  get  down  to  brass  tacks? 

To  get  back,  therefore,  to  the  same*  brass  tacks,  if  a  druggist 
can  compete  with  a  fellow  druggist  in  the  sale  of  Pluto  water 
at  4<Dc.  a  bottle  while  compelling  me  to  pay  for  a  2c.  stamp  as  a 
tax,  there  is  no  reason  why  every  dealer  in  every  article  of 
commerce  cannot  be  made  to  collect  a  tax  on  his  sales  in  the 
same  manner.  The  main  difference  is  that  where  goods  are 
sold  in  bulk,  as  must  be  the  case  down  to  the  retailer,  the 
sales  sheets  must  show  the  transaction  entire,  and  the  invoice 
should  be  made  to  show  the  transaction  with  respect  to  each 
purchaser.  There  is  nothing  to  force  the  druggist  to  sell  the 
stamp  to  me.  If  he  was  not  afraid  I  would  preach,  he  might 
let  me  have  the  Pluto  water  for  4OC.  and  forget  the  2c.  stamp. 
In  the  general  process  of  distribution  in  bulk  this  forgetfulness 
could  not  be. 

Dr.  Adams,  while  admitting  the  difficulty  of  administration 
of  special  taxes  on  medicinal  articles,  fountain  drinks,  and 
"luxuries,"  and  even  urging  their  repeal,  still  insists  on  the 
superiority  of  special  taxes  on  selected  articles  of  general  con- 
sumption in  preference  to  a  general  tax  on  all  articles  of  con- 
sumption. Much  as  I  respect  Dr.  Adams,  I  must  differ  from 
him.  It  is  one  of  the  annoying  weaknesses  of  the  present 
hodgepodge  of  sales  taxes  that  no  force  of  Treasury  employees 
can  ever  check  up  the  tax  properly.  The  constantly  reiterated 
assertion  of  Dr.  Adams  that  a  simple,  omnibus  overturn  tax 
would  impose  added  confusion  on  top  of  a  present  confusion 
which  it  is  intended  to  abolish  is  one  of  those  things  no  fellow 
can  understand. 

Another  of  Dr.  Adams'  obsessions  is  that  an  overturn  tax 
would  favor  large  multiple  process  concerns  as  opposed  to  a 
series  of  single  process  concerns.  As  against  Dr.  Adams'  theory 
I  would  give  far  greater  weight  to  the  testimony  of  practical 
business  men.  Charles  E.  Lord,  one  of  the  largest  cotton 


86  SELECTED   ARTICLES 

manufacturers  in  the  United  States,  ought  to  know  something 
about  his  own  business.     He  says: 

Multiple  process  concerns  and  single  process  concerns  at  present 
exist  side  by  side  in  the  same  line  of  business.  Each  has  its  reasons 
for  being.  The  multiple  process  concern  has  certain  advantages  and  dis- 
advantages. It  may  own  sources  of  raw  material,  save  the  profits  of 
intermediary  processes,  save  transportation  charges,  etc.  On  the  other 
hand  it  is  clear  that  in  large  organizations  the  overhead  and  administra- 
tion charges  are  greater  than  in  small  units,  the  immobility  of  the  business 
is  greater,  often  the  proportion  of  the  capital  not  invested  in  immediately 
productive  sources  larger,  so  that  the  balance  of  advantage  frequently 
rests  with  the  single  process  concern  where  the  product  is  specialized. 
The  existence  of  both  classes  of  concerns  is  due  to  deep  fundamental 
causes  on  which  so  superficial  a  factor  as  a  i  per  cent  tax  on  sales  will 
have  no  appreciable  bearing. 

Mr.  Lord  finds  that  in  the  case  of  single  process  concerns 
whose  completed  products  reach  the  consumer  to  say  $4.50,  the 
combined  tax  from  that  on  the  raw  cotton  handled  twice  (by 
grower  and  factor),  on  the  spinning,  the  dyeing,  the  weaving,  the 
jobbing  and  the  retailing  is  I2^c.,  or  less  than  3  per  cent  of 
the  consumer's  price.  In  the  case  of  the  single  process  concern 
the  saving  in  tax  would  be  about  ic.,  or  less  than  l/$  of  i  per 
cent  on  the  final  price. 

In  the  case  of  the  wood  pulp  industry  the  total  competitive 
difference  between  a  large  organization  owning  its  mines  and 
forests,  making  its  own  chemicals  and  carrying  on  every  process 
up  to  the  finished  paper,  and  single  process  concerns  buying 
wood  pulp  and  manufacturing  paper  is  only  about  %  of  I  per 
cent.  Similar  figures  are  reached  in  other  lines  of  business 
which  have  been  examined. 

Practical  considerations  like  these  ought  to  lay  the  ghost  of 
monopoly  fostered  by  encouragement  of  combinations  through 
an  overturn  tax. 

Another  bugaboo  is  the  newsboy,  the  corner  fruit  man,  and 
the  small  farmer.  How,  it  is  asked,  are  you  going  to  keep  tab 
on  them  ?  You  don't  have  to.  It  is  proposed  to  differentiate 
this  overturn  tax,  which  is  intended  to  be  practical,  from  im- 
practical taxes  like  some  of  those  now  on  the  statute  books. 
That  can  be  done  by  relieving  from  responsibility,  as  collectors 
of  the  tax,  vendors  who  do  not  sell  more  than  $500  worth  of 
goods  in  a  month  or  $6,000  in  a  year.  If  the  poor  newsboy  or 
small  tradesman  has  an  overturn  of  $500  or  more  in  a  month, 
it  is  high  time  that  some  method  be  found  to  force  him  to 
keep  track  of  his  business  by  keeping  at  least  a  cash  book.  It 
is  safe  to  say  that  the  resultant  benefit  to  him  would  be  far 
greater  than  the  cost  to  him  of  the  tax.  As  for  the  poor 


TAXATION  87 

farmer  who  sells  less  than  $6,000  of  produce  in  a  year,  it  is 
difficult  to  feel  deep  sympathy  for  the  hardship  of  the  tax  on 
him.  He  not  only  should,  but  I  venture  freely  to  say  that  he 
would,  get  the  same  price  for  his  wheat  as  his  neighbor  who 
sold  $10,000  worth.  The  only  difference  is  that  he  would  not 
have  to  turn  in  to  the  government  the  i  per  cent  collected  from 
the  elevator  company. 

A  representative  of  the  Federation  of  Farm  Bureau  Asso- 
ciations writes  me  that  the  farmer  could  not  collect  the  tax 
from  the  elevator  company  because  the  price  of  wheat  is  made 
in  Liverpool,  that  he  could  not  add  a  sales  tax  to  export  com- 
modities and  neither  could  he  add  it  on  a  falling  market.  As 
a  matter  of  fact  probably  no  farmer  even  sells  his  wheat 
directly  for  export.  If  he  did  he  would  possibly  be  relieved 
from  collecting  that  tax  from  his  customer,  in  which  case  he 
would  have  exactly  the  same  net  returns  as  though  he  sold  it 
to  an  elevator  company  and  collected  a  I  per  cent  tax.  If  Mr. 
Ford  sells  a  Michigan  mule  to  me  for  $650  and  I  sell  it  in 
Canada,  Mr.  Ford  bills  the  5  per  cent  tax  to  me  regardless  of  the 
destination  of  the  mule.  So  also  if  he  reduces  the  price  from 
$650  to  $510  he  continues  to  bill  and  collect  the  5  per  cent. 

What  can  be  done  with  one  article  on  one  sale  can  be  done 
with  many  articles  on  many  sales.  What  can  be  done  with  an 
excise  tax  on  ice-cream  soda  sold  to  me,  or  with  a  tariff  tax  on 
coffee,  can  be  done  with  any  article  sold  by  anybody  to  anybody, 
only  it  can  be  done  much  more  simply  and  efficiently  and  justly. 

The  same  farmer  authority — one  of  Congressman  Frear's 
fifteen  ablest  men  who  have  ever  studied  the  tax  question — 
assures  me  that  when  a  farmer  sells  his  goods  for  less  than 
cost  he  impairs  his  capital.  Quite  obvious.  But  if  wheat  at  $2 
a  bushel  results  in  impairment  of  capital  without  any  sales  tax, 
wheat  at  $2.02  a  bushel  with  a  compulsorily  collected  sales  tax, 
results  in  no  greater  impairment.  The  tax  comes  from  the 
purchaser,  not  the  seller.  The  competition  to  sell  and  the  loss 
of  capital  on  an  undercost  sale  are  exactly  the  same  with  or 
without  the  tax. 

Are  not  the  words  "sales  tax"  a  convenient  misnomer?  In 
effect,  with  a  compulsory  invoicing,  the  tax  is  really  a  purchase 
tax.  To  the  extent  that  the  middleman  adjusts  his  price  with 
relation  to  cost,  just  as  he  would  do  were  there  no  tax,  he 
makes  or  loses  money,  but  the  tax  has  no  more  to  do  with  his 


88  SELECTED   ARTICLES 

decision  to  sell  at  a  loss  than  the  labor  or  freight  or  rental 
charge.  In  fact  it  has  far  less  to  do  with  it  because  it  is  smaller, 
and  it  is  measured  as  a  cost,  entirely  by  his  purchases,  and  not 
by  his  sales. 

Another  screen  of  underbrush  has  been  cultivated  by  advo- 
cates of  a  sales  tax  who  talk  about  it  as  a  substitute  for  the 
excess  profits  tax.  It  is  nothing  of  the  kind.  It  cannot  be,  in 
the  very  nature  of  things.  In  so  far  as  an  overturn  tax,  by  an 
equitable  and  systematic  distribution  of  the  consumption  tax 
burden,  could  without  injustice  produce  more  net  revenue  than 
is  produced  by  the  present  chaotic  sales  taxes  which  it  is 
designed  to  replace,  it  would  relieve  the  income  tax  situation. 

The  excess  profits  tax  is  really  nothing  more  nor  less  than 
a  surtax  on  corporations,  balancing  roughly  the  surtax  on 
individuals.  Both  the  excess  profits  tax  and  the  individual 
surtaxes  are  higher  than  their  productivity  point.  General 
consensus  now  appears  to  be  that  32  per  cent  or  33  per  cent  is 
about  the  maximum  productivity  point  of  individual  surtaxes. 

The  problem  with  respect  to  corporation  taxes  is  to  find  the 
corresponding  point  and  method.  It  is  an  entirely  different 
story.  It  has  nothing  to  do  with  an  overturn  sales  tax,  except 
as  rates  of  income  tax  may  be  adjusted  to  the  productivity  of 
the  sales  tax. 

The  real  question  with  respect  to  the  overturn  tax  is  whether 
or  not  it  would  be  more  simple,  more  just,  more  easily  admin- 
istered, more  productive,  than  the  present  chaotic  sales  taxes, 
with  prospect  of  additional  chaos  and  added  injustice  following 
an  addition  to  the  list  of  arbitrary  levies.  To  that  I  can  see 
only  one  answer — Yes. 

I  have  directed  my  remark  chiefly  to  administrative  objec- 
tions. I  have  assumed  that  this  gathering  would  agree  to  the 
broad  proposition  that  if  it  were — as  I  am  sure  it  is — possible 
to  administer  an  overturn  sales  tax  and  make  it  just  what  it 
ought  to  be — a  consumption  tax — there  would  be  no  objection 
to  the  general  principle. 

The  general  principle  itself  is  also   simple: 

It  would  provide  a  base  for  a  large  portion  of  the  govern- 
ment revenue  more  tangible  than  profits  and  income;  not  a  base 
necessarily  larger  than  the  present  base  of  special  sales  taxes, 
augmented  by  still  more  special  taxes,  but  a  base  firmly  deter- 
mined in  equity  to  all. 


C 
' 


TAXATION  89 

It  would  rest  fairly  as  between  citizens.  The  one  who  con- 
sumes  the  most  and  spends  the  most  would  pay  the  most  in 
this  particular  tax. 

It  would  not  be  a  special  tax  on  the  maa  who  must  buy 
medicine  for  his  children  or  on  the  stenographer  who  buys  an 
ice-cream  soda  for  her  luncheon. 

Why  should  a  baby  pay  a  specific  tax  on  its  medicine  for 
colic? 

Why  should  a  man  pay  a  specific  tax  on  a  bottle  of  liniment 
for  a  sore  toe? 

Should  a  person  when  he  is  ill  pay  a  specific  tax  and  not  pay 
a  general  tax  when  he  is  well? 

The  existing  excises  tax  the  motor  truck,  but  not  the  horse- 
drawn  vehicle  doing  the  same  work  ;  they  tax  the  fur  coat  of 
the  farmer  and  lumberman  which  he  can  scarcely  do  without, 
but  not  a  cloth  coat  which  for  many  uses  is  less  desirable  ;  and 
they  tax  the  piano  necessary  for  the  child  to  obtain  its  proper 
musical  education,  or  the  band  instrument  with  which  he  may 
later  earn  his  living,  but  not  the  toy  with  which  he  amuses 
himself. 

It  would  encourage  thrift  instead  of  waste.  If  you  don't  buy 
a  silk  shirt,  you  do  not  pay  the  tax.  If  you  do  buy  a  yacht,  you 
do  pay  the  tax. 

It  could  not  increase  the  price  of  commodities  beyond  the 
amount  of  the  tax  itself. 

It  would  be  simple  in  collection  and  auditing  for  both 
government  and  taxpayer  —  or  more  properly,  in  the  latter  case, 
the  drafted  tax  collector. 

It  would  bring  the  collection  of  a  substantial  part  of  the 
revenue  up  to  date. 

It  would  be  sure  in  its  incidence,  simple  in  its  application,)  ? 
economical  in  its  collection,  and  would  have  all  the  attributes^' 
of  just  taxation. 

"When  this  base  has  been  supplied,  you  can  adjust  your 
individual  and  corporate  income  tax  rates  to  fit  the  situation 
and  maintain  the  proper  balance. 

SALES  TAX  EXPERIENCE  * 

The  critics  and  opponents  of  the  sales  tax  would  win  a 
better  hearing  if  they  offered  any  preferable  alternative  and  if 

1  Editorial.  New  York  Times.  May  14,   1921. 


go  SELECTED  ARTICLES 

they  did  not  claim  too  much  in  their  favor  from  the  experience 
v  of  other  countries.  It  approaches  false  witness  to  say  that  the 
sales  tax  is  disliked  or  is  unsuccessful  in  the  Philippines.  All 
taxes  are  disliked  everywhere,  and  it  is  impossible  to  imagine  a 
perfect  substitute;  but  in  the  Philippines  the  sales  tax  is  liked 

f  better,  or  rather  is  disliked  less,  the  longer  it  is  collected.  France 
is  not  collecting  what  was  expected  from  its  sales  tax,  but  it 

j  is  retained  in  the  budget,  and  it  is  not  criticised  there  on  the 
points  which  its  opponents  make  much  of  here.  The  fault  may 
lie  equally  with  an  optimistic  estimate  of  the  yield  of  an  untried 
and  novel  tax,  or  with  depression  of  trade  for  reasons  effective 
everywhere,  and  not  particularly  where  there  is  a  sales  tax. 
Too  many  French  taxes  are  disappointing  under  present  con- 
ditions to  condemn  any  one  tax  in  particular  because  of  its 
specific  defects.  The  introduction  of  the  Canadian  budget  is 
particularly  embarrassing  to  those  who  have  emphasized  the 
Dominion  sales  tax  experience  as  a  warning  against  our  follow- 
ing the  example. 

Canadian  budgeteers  think  so  highly  of  the  sales  tax  that 
they  increased  it  in  their  budget  this  week.  The  Canadian  sales 
tax  is  not  a  general  turnover  tax,  but  is  confined  to  traders — 
manufacturers,  wholesalers,  jobbers,  importers,  and  not  includ- 
ing retailers.  This  intertraders'  tax  of  I  per  cent  is  increased 
to  i%  per  cent.  The  2  per  cent  tax  on  sales  by  manufacturers 
to  retailers,  or  directly  to  consumers,  is  also  increased  by  half 
to  3  per  cent.  Exemptions  are  foodstuffs  in  natural  state  and 
first  sales  of  products  of  farms,  fisheries,  mines  and  forests. 
As  Canada  produces  many  articles  which  also  are  imported,  the 
customs  is  made  I  per  cent  above  the  sales  tax.  In  presenting 
the  budget  Sir  Henry  Drayton  did  not  even  refer  to  objections 
to  the  sales  tax  and  was  rather  apologetic  that  he  did  not 
accept  many  suggestions  by  Boards  of  Trade  and  commercial 
bodies  to  make  the  sales  tax  of  broader  application.  The  budget 
speech  does  not  itemize  the  sales  tax  proceeds,  but  the  Dominion 
press  mentions  $100,000,000.  A  good  epitome  of  Canadian 
opinion  was  given  by  a  Canadian,  J.  F.  M.  Stewart,  at  the  recent 
meeting  of  the  United  States  Chamber  of  Commerce  in  Atlantic 

f  City :  "The  sales  tax  was  well  received  by  the  people  of  Canada. 
Y-l  It  has  not  proved  burdensome,  nor  an  undue  handicap  on  our 
r  /  commercial  activities.     It  is  simple  in  its  application,  easy  and 
!\  cheap  to  collect,  and  it  is  productive  of  substantial  revenues." 


TAXATION  91 

Senator  Smoot's  sales  tax  bill  is  so  much  more  inclusive 
than  the  Canadian  bill,  and  our  volume  of  trade  is  so  much 
greater,  that  his  estimate  of  a  yield  of  $1,250,000,000  is  reason- 
able, even  moderate.  The  exemptions  in  our  proposed  sales  tax 
include  all  businesses  of  less  than  $6,000  a  year.  Below  that  the 
tax  would  be  small  and  disproportionately  difficult  of  collection. 
Above  that  better  accounts  would  be  kept.  Of  course,  every- 
body would  prefer  that  there  should  be  no  sales  tax,  or  that 
there  should  be  a  better  tax.  Who  suggests  one,  or  doubts  that 
there  must  be  a  tax  to  support  the  nation's  expenditures?  What 
tax  could  be  expected  to  enjoy  a  more  general  endorsement  by 
business  men  than  the  sales  tax  has  received?  And  when  the 
interested  opposition  is  separated  from  the  rest,  how  small  and 
theoretical  is  the  remnant! 


PROPOSED  SALES  TAX  1 

I  desire  to  take  a  few  moments  of  the  Senate's  time  this 
morning  for  the  purpose  of  explaining  briefly  the  provisions  of 
the  sales  tax  bill  which  I  have  introduced,  known  as  Senate  bill 
202,  which  I  hope  may  become  a  part  of  the  revenue  laws  of 
our  country.  For  the  Record  and  as  a  part  of  my  speech  I 
send  to  the  desk  a  copy  of  the  bill  and  ask  that  it  be  printed 
in  the  Record  without  reading. 

Be  it  enacted,  etc.,  That  this  act  may  be  cited  as  "The  sales  tax  act, 
1921." 

TITLE  I. — GENERAL  PROVISIONS. 

DEFINITIONS. 

SEC.  2.    That  when  used  in  this  act— 

The  term  "person"  includes  individuals,  partnerships,  corporations,  and 
associations; 

The  term  "secretary"  means  the  Secretary  of  the  Treasury; 

The  term  "commissioner"  means  the  Commissioner  of  Internal  Rev- 
enue; and 

The  term  "collector"  means  collector  of  internal  revenue. 

TITLE  II. — SALES  TAX. 

SEC.  201.  That  in  addition  to  all  other  taxes,  there  shall  be  levied, 
assessed,  collected,  and  paid  upon  all  goods,  wares,  or  merchandise  sold 
or  leased  on  or  after  July  i,  1921,  a  tax  equivalent  to  i  per  cent  of  the 
price  for  which  so  sold  or  leased;  such  tax  to  be  paid  by  the  vendor  or 
lessor. 

SEC.  202.  (a)  That  this  title  shall  not  apply  to  sales  and  leases  made 
during  any  year  in  which  the  total  price  for  which  the  taxable  sales  and 
leases  are  made  does  not  exceed  $6,000. 

1  Speech  of  Senator  Reed  Smoot.    Congressional  Record,  April  27,  1921. 


92  SELECTED   ARTICLES 

(b)  In   computing  the   tax   due    under   this  title   every   taxpayer   shall 
be  entitled  to  an  annual  exemption  of  $6,000. 

(c)  In    any    case    where    the    full    amount    of    the    exemption    is    not 
claimed  in   computing  the  tax   due   for   the   first  quarter,   the   part   not   so 
claimed  shall   be   deducted   in  computing  the  tax  due  for  the  second  quar- 
ter  or   succeeding  quarters.      For   the   purpose   of   this   act   the   first   quar- 
ter   shall    be    the    months    of    July,    August,    and    September;     the    second 
quarter,    the    months    of    October,    November,    and    December;    the    third 
quarter,    the    months    of    January,    February,    and    March;    and   the    fourth 
quarter,  the  months  of  April,  May,  and  June. 

(d)  The  taxes  imposed  by   this  title  shall  not  apply  to  sales   or  leases 
made   by    (i)    the   United    States;    (2)    any   foreign   Government;    (3)    any 
State    or    Territory,    or    political    subdivision    thereof,    or    the    District    of 
Columbia;     (4)    any    mutual    ditch    or    irrigation    company;    (5)    any    hos- 
pital;   or    (6)    Army    and    Navy    commissaries    and    canteens;    or    (7)    any 
corporation    organized    and    operated    exclusively    for    religious,    charitable, 
scientific,    or    educational    purposes,    or    for    the    prevention    of    cruelty    to 
children  or   animals,   no  part   of  the   net   earnings  of   which  inures  to  the 
benefit  of   any  private  stockholder   or    individual. 

(e)  The  taxes  imposed  by  this  title  shall  not  apply  to  sales  or  leases 
of  articles    taxable    under   Title   VI    or    VII    or   paragraphs    (i),    (2),    (3), 
(12),  and   (20)   of  section  900  of  the  revenue  act  of  1918. 

(f)  Under   such   rules   and  regulations   as   the   commissioner,   with   the 
approval    of   the   secretary,    may   prescribe   the   taxes   imposed    by   this    title 
shall   not    apply   in    respect   to   articles    sold   or   leased    for    export   and   in 
due   course   so   exported. 

SEC.  203.  That  in  computing  the  taxes  imposed  by  this  title  no  credit 
shall  be  allowed  for  any  tax  reimbursed  or  paid  in  any  manner  to  any 
person  in  connection  with  any  previous  transaction  in  respect  to  which 
a  tax  is  imposed  by  law. 

SEC.  204.  That  every  person  liable  for  any  tax  imposed  by  section  201 
shall  make  quarterly  returns  under  oath  in  duplicate  and  pay  the  tax 
imposed  by  such  section  to  the  collector  for  the  district  in  which  is 
located  the  principal  place  of  business.  Such  returns  shall  contain  such 
information  and  be  made  at  such  times  and  in  such  manner  as  the  com- 
missioner, with  the  approval  of  the  Secretary,  may  by  regulation  pre- 
scribe. 

The  tax  shall,  without  assessment  by  the  commissioner  or  notice  from 
the  collector,  be  due  and  payable  to  the  collector  at  the  time  so  fixed 
for  filing  the  return.  If  the  tax  is  not  paid  when  due,  there  shall  be 
added  as  part  of  the  tax  a  penalty  of  5  per  cent,  together  with  interest 
at  the  rate  of  i  per  cent  for  each  full  month  from  the  time  when  the 
tax  became  due. 

SEC.  205.  That  in  the  case  of  an  overpayment  of  any  tax  imposed  by 
this  act,  the  persons  making  such  overpayment  may  take  credit  therefore 
against  taxes  due  upon  any  quarterly  return. 

SEC.  206.  That  the  commissioner  with  the  approval  of  the  secretary, 
is  authorized  to  make  all  needful  rules  and  regulations  for  the  enforce- 
ment of  the  provisions  of  this  act. 

The  commissioner  with  such  approval  may  by  regulation  provide  that 
any  return  required  by  this  act  to  be  made  under  oath  may,  if  the  amount 
of  the  tax  covered  thereby  is  not  in  excess  of  $10,  be  signed  or  acknowl- 
edged before  two  witnesses  instead  of  under  oath. 

SEC.  207.  That  on  and  after  July  i,  1921,  sections  628,  629,  630,  902, 
904,  905,  906,  907,  and  900,  except  paragraphs  (i),  (2),  (3),  (12),  and 
(20),  are  repealed,  except  that  such  sections  shall  remain  in  force  for  the 
assessment  and  collection  of  all  taxes  which  have  accrued  thereunder  and 
for  the  imposition  and  collection  of  all  penalties  which  have  accrued  and 
may  accrue  in  relation  to  any  such  taxes. 

Mr.  President,  I  have  given  considerable  study  to  the  wisdom 
of  enacting  into  law  a  general  sales  tax,  and  now  present  three 
alternative  propositions  as  a  basis  for  such  tax  which,  stated 
briefly,  are  as  follows: 


TAXATION  93 

1.  A  rate  of  ^  of  I  per  cent,  but  not  to  exceed  I  per  cent, 
on   all  sales   without  distinction   of   integrated   or   unintegrated 
concerns. 

2.  A  rate  of  54  of  I  per  cent,  but  not  to  exceed  i^  per  cent, 
with  a  credit   for  taxes  previously  paid  on  goods  bought   for 
resale. 

3.  A  rate  of  I  per  cent,  but  not  to  exceed  2  per  cent,  without 
distinction  of  integrated  or  unintegrated  concerns,  but  exempting 
each  dealer  on  the  first  $50,000  of  annual  sales. 

For  simplicity  of  administration  and  collection  of  the  tax,  I 
have  concluded  to  support  the  first-named  plan,  and  for  the  pur- 
poses of  this  bill  have  specified  a  rate  of  tax  of  I  per  cent.  If  at 
any  time  the  amount  to  be  raised  from  such  a  tax  is  to  be  re- 
duced or  increased,  the  only  amendment  required  to  the  law 
would  be  to  change  the  rate  of  tax. 

The  bill  I  have  offered  follows  closely  the  provisions  of  the 
Philippine  sales  tax,  which  today  is  the  most  satisfactory  tax 
to  all  classes  and  the  most  productive  that  is  imposed  in  the 
islands. 

I  now  ask  the  attention  of  Senators  to  a  brief  explanation  of 
the  principal  provisions  of  the  bill.  Later,  when  the  revision  of 
the  revenue  laws  is  before  the  Senate,  I  shall  take  pleasure  in 
discussing  it  in  detail. 

i.     What  Is  a  Genera!  Sales  Tax? 

A  tax  on  the  gross  value  of  goods,  wares,  and  merchandise, 
whether  raw  material  or  manufactured  or  partially  manufac- 
tured products,  whether  of  domestic  or  of  foreign  origin,  and 
such  as  are  generally  sold  or  exchanged  and  delivered  for  domes- 
tic consumption,  whether  in  barter  or  on  a  cash,  credit,  or  install- 
ment basis,  which  tax  shall  accrue  at  the  time  of  sale  or  lease  of 
all  such  goods,  wares,  and  merchandise,  at  the  rate  of  I  per  cent 
of  their  total  value  at  the  time  of  such  change  of  ownership. 
This  tax  also  applies  to  the  total  amount  or  amounts  received  on 
all  leases  of  goods,  wares,  and  merchandise. 

The  I  per  cent  sales  tax  is  similar  to  an  overhead  charge,  to 
be  added  to  the  cost  of  the  goods  and  finally  paid  by  the  ulti- 
mate consumer,  but  there  is  nothing  in  the  bill  to  prevent  the 
seller  of  the  goods  from  absorbing  the  i  per  cent  charge,  and 
that  no  doubt  will  be  done  with  many  establishments  where 
their  sales  profits  are  large. 


94  SELECTED   ARTICLES 

2.     What  Are  the  Proposed  Exemptions? 

All  sales  and  leases  are  exempt  from  this  tax  when  made  by— 

1.  The  United  States  or  by  any  State  or  Territory,  or  politi- 
cal subdivision  thereof,  or  by  the  District  of  Columbia,  or  by 
any  Army  or  Navy  commissary  or  canteen. 

2.  By  any  foreign  government. 

3.  By  any  mutual  ditch  or  irrigation  company. 

4.  By  any  hospital   or   by   any   corporation   organized   and 
operated     exclusively    for    religious,     charitable,     scientific,    or 
educational  purposes,  or  for  the  prevention  of  cruelty  to  chil- 
dren or  animals,  no  part  of  the  net  earnings  of  which  inures  to 
the  benefit  of  any  private  stockholder  or  individual. 

Sales  and  leases  of  the  following  goods,  wares,  and  merchan- 
dise shall  also  be  exempt  from  this  tax : 

1.  Such  as  are  sold  or  leased  for  export  and  in  due  course 
are  actually  exported. 

2.  Such  as  are  subject  to  the  taxes  imposed  in  Titles  VI 
and   VII   of   the   revenue   act   of    1918;    i.e.,   beverages,   cigars, 
tobacco,  and  manufactures  thereof. 

3.  Such  as  are  subject  to  the  taxes  imposed  in  paragraphs 
(i),  (2),  (3),  (12),  and  (20)  of  section  900  of  the  revenue  act 
of  1918;  i.e.,  automobiles,  automobile  trucks  and  wagons,  motor- 
cycles  and  tires,   parts,   and   accessories ;   dirk  knives,   stilettos, 
and  so  forth ;  yachts,  motor  boats,  and  so  forth,  to  be  used  as 
pleasure  boats. 

4.  Total  sales  and  leases  on  goods,  wares,  and  merchandise 
which  in  any  taxable  year  do  not  exceed  $6,000. 

3.     What  Are  Its  Advantages  When  Compared   With  Other 

Taxes? 

I.  Its  extreme  simplicity  of  assessment  and  collection. 
The  employment  by  the  taxpayers  of  costly  tax  experts  is  quite 
unnecessary  as  is  the  burdening  of  the  tax  administrative 
machinery  with  complicated,  expensive,  and  long-drawn-out 
audits  causing  long  delays  in  the  collection  of  taxes.  It  is  not 
inquisitorial;  it  does  not  raise  difficult  questions  about  losses, 
depreciation,  and  the  like;  it  is  more  easily  allocated  among 
competing  jurisdictions  than  a  tax  upon  net  income.  No  reve- 
nue defrauder  in  the  Philippines  ever  claimed  ignorance  of  the 
law  in  palliation  of  his  offense. 


TAXATION  95 

I  notice  in  the  morning  paper  today  a  dispatch  from  Buffalo, 
N.  Y.,  reading  as  follows: 

MADE    INSANE    BY     TAX    BLANK WOMAN    FEARED     STORE     WOULD    BE    SEIZED     FOR 

ERROR    IN    REPORT 

BUFFALO,  N.Y.,   April  26. 

Papers  filed  in  the  county  clerk's  office  here  today  state  that  Ethel  J. 

Mahan,  owner  of  a  grocery  store,  became  so  worried  over  fear  that  the 
Government  would  confiscate  her  business  because  of  possible  errors  in 
her  income  tax  report  that  she  lost  her  mind. 

The  woman  was  committed  to  the  State  hospital  for  the  insane  by  Act- 
ing County  Judge  Ottoway. 

At  some  future  time,  Mr.  President,  I  want  to  go  into  this 
question  more  in  detail. 

2.  Each  taxpayer  pays  out  of  his  gross  incorne  his  sales  tax 
and  automatically  grades   the  amount  according  to   his   ability 
to  pay;  this  grading  is  far  more  exact,  scientific,  and  equitable 
than   are   the  artificial   steps    or   brackets   imposed   by   the   net 
income-tax   system   of   existing  revenue    laws.     Under   a   sales 
tax  the  taxpayer  pays  as  he  goes  along  and  does  not  feel  the 
burden,    while    under    the    existing    revenue    law    hundreds    of 
thousands   of   income   taxpayers    are    today,    when    reduced   in- 
comes are  the  rule,  greatly  harassed  by  the  payment  of  taxes 
which  accrued  a  year  ago  when  incomes  and  profits  were  greater 
than  they  are  today. 

3.  The  tax  rate  is  low  and  uniform  on  all  goods,  wares,  and 
merchandise.     The   fact  that  it   applies   alike  to  all   mercantile 
transactions   makes   possible    for   greater   productivity,    together 
with  a  low  tax  rate.     The  absence  in  the  Philippines  of  dis- 
criminatory tax  rates  leaves  all  taxpayers  satisfied   (i)   because 
all  pay  the  same  rate,  and  (2)  because  goods  sufficiently  similar 
to  be  competitive,  even  though  not  identical,  are  taxed  alike.    The 
high  discriminatory  tax  rates   imposed  under  existing  revenue 
laws    appeal   to   the   tax   payers   as    extremely   unfair   and   are 
resented  by  them.     This  is  the  main  cause  why  the  tax  admin- 
istration  has   thrown    up   its   hands,    recommending   the    repeal 
of  some  of  these  consumption  taxes,  because  they  say  they  are 
easily  evaded  and  too  costly  to  collect. 

4.  The  taxpayer  can  tell  to  a  cent  and  with  absolute  cer- 
tainty and  with  a  minimum  of  effort  at  the  close  of  business 
each  day  exactly  where  he  stands  as  to  profits  and  tax  liability. 
Under    the    complicated    existing    excess-profits    tax    the    tax- 
payer never  knows,  to  a  certainty,  what  amount  of  profit  he 
has  to  add  to  his  business  to  come  out  whole.     Naturally  he 
adds  all  he  thinks  necessary,  and  experience  has  demonstrated 


96  SELECTED  ARTICLES 

that  in  many  cases  he  has  doubled  or  trebled  the  amount,  all 
of  which  inevitably  results,  as  the  goods  pass  along  to  the  ulti- 
mate consumer,  in  a  pyramiding  of  prices.  An  investigation 
made  by  the  Department  of  Justice  in  connection  with  the 
Lever  Act  tended  to  show  that  as  a  direct  result  of  the  unwise 
and  complex  provisions  of  the  excess  profits  law  the  prices  of 
certain  commodities  to  the  ultimate  consumer  were  increased 
over  23  per  cent.  A  simple,  sane,  intelligible  sales  tax  at  a  rate 
of  i  per  cent,  even  though  pyramided  several  times,  would 
nevertheless  be  but  a  fraction  of  23  per  cent  and  would  certainly 
result  not  in  an  increase  but  in  a  substantial  reduction  of  the 
present  high  prices  of  necessities. 

4.     What   Other  Taxes  in  the  United  States  Does  Its  Method 
of  Operation  and  Accumulation  Resemble? 

1.  Customs   duties   on  imports.     Even   though  the   customs 
duty  is  not  repeated  on  each  turnover  of  imported  goods  on 
their    way    from    the    importer    all    the    way    through    various 
middlemen,    still    the    effect   on    the   ultimate   consumer   of   the 
pyramiding  of   the  various  profits   on  the  values,   both   of  the 
costs  of  the  goods  and  of  the  customs  duties,  is  usually  several 
times  as  great  as  is  the  accumulation  of  the  sales  taxes.     The 
customs  duties  usually  begin  with  a  high  specific  or  ad  valorem 
rate;  therefore  the  final  tax  content  of  the  cost  of  the  goods 
to  the  ultimate  consumer  is  several  times  as  great  as  a   i  per 
cent  sales  tax  can  never  reach,  even  with  half  a  dozen  turn- 
overs.    But  American  consumers  during  many  years  have  be- 
come  so   accustomed  to  the  high  customs   duties   and  to  their 
manner  of  accumulation  that  now  they  seldom  remember  that 
they  are  paying  highly  compounded  duties  whenever  they  buy 
imported  goods. 

2.  Tobacco  products,  beverages,  etc.,  paying  high  excise  or 
luxury  tax  rates.     The  same  remarks  apply  in  this  case  as  in 
the  matter  of  the  accumulation  of  customs  duties  in  the  pre- 
ceding paragraph. 

3.  Personal  property  taxes  for  local  purposes,  imposed  peri- 
odically by  city  and  state  governments,  on  goods,  wares,  and 
merchandise  on  the  shelves  and  in  the  warehouses  of  merchants 
and  manufacturers.     The  tax  rates  in  these  cases  are  usually 
about  the  same  rate  as  is  the  sales  tax  rate,  though  often  in 
some    localities     much     greater.      This     tax     is     collected     on 


TAXATION  97 

merchants'  stock  of  goods  before  they  are  sold.  The  sales  tax 
would  be  collected  on  identically  the  same  goods  at  the  time 
of  their  sale  and  not  before.  Surely  the  merchant  and  manu- 
facturer are  better  able  to  pay  their  taxes  when  they  have  made 
a  sale  and  have  the  money  than  they  would  be  on  a  lot  of  dead 
stock. 

5.     What  Have  Its  Results  Been  in  the  Philippines  During  the 
First  Sixteen  Years  of  Its  Operation? 

1.  It  has  become  the  most  productive  item  in  the  insular 
tax   system. 

2.  It  has  not  hampered  any  type  of  business  or  manufac- 
ture in  the  island;  it  is  precisely  during  the  life  of  the  sales  tax 
law  that  commerce  and  industry  of  all  kinds  have  thrived  as 
never  before. 

3.  The    Philippine    Government    is    enthusiastic    over    the 
results   of   the   sales   tax   and   so   cabled   the    Secretary  of   the 
Treasury  in   Washington   four   months   ago,    stating  that   their 
sales    tax    was    the    "most    equitable,    productive,    simple,    and 
economical"   tax   they  had;    that   the   original   tax   rate   of    l/s 
of   i  per  cent  had  been  increased  to   a   full   I   per  cent;   and 
that   the    Philippine    Government   was    then    (December,    1920) 
considering  the   advisability  of   again   increasing  the   tax   rate, 
this  time  from  I  per  cent  to  2  per  cent  per  turnover. 

4.  Prominent   merchants   with   offices    in   Manila   and    New 
York  City  have  in  printed  statements  been  equally  as  enthusi- 
astic over  the  operation  of  the  sales  tax  law  as  is  the  Philip- 
pine Government,  as  quoted  in  the   foregoing  paragraph.     In- 
dustrial and  commercial  methods  and  conditions  in  the  Philip- 
pines have,  during  the  last  twenty-two  years,  become  thoroughly 
Americanized  as  scores  of  reputable  witnesses — formerly  in  the 
Philippines  and  now  in  this  country — are  willing  to  testify.     All 
of  which  should  be  sufficient  to  prove  an  error  in  judgment  on  the 
part  of  those  in  this  country  who  have,  on  scant  knowledge  of 
their  own,  condemned  the  Philippine  sales  tax  as  being  in  prin- 
ciple rank  economic  heresy  and  in  operation  impracticable. 

6.     Where  Does  Its  Final  Incidence  Normally  Rest? 

Normally,  the  entire  taxes  paid  on  each  turnover  are  shifted 
and  rest  finally  on  the  ultimate  consumer,  this  because  the 
purpose  of  all  business  is  profit  and  the  cost  of  goods  includes 


98  SELECTED   ARTICLES 

every  item  of  expense  such  as  raw  material,  labor,  freight,  rent, 
traveling  expenses,  interest,  selling  expenses,  losses,  and  taxes. 
All  of  these  items  are  normally  shifted  to  the  ultimate  con- 
sumer. It  can  be  demonstrated  with  mathematical  accuracy 
that  even  with  a  half  a  dozen  turnovers,  and  the  corresponding 
I  per  cent  taxes,  the  price  of  commodities  to  the  ultimate  con- 
sumer is  very  rarely  increased  over  ^/2  per  cent.  Compare  this 
with  the  23  per  cent  increase  resulting  from  the  operation  of 
the  excess-profits  tax.  The  2^  or  3^  per  cent  tax  content  in 
commodities  bought  by  the  ultimate  consumer  means  that  a 
lot  of  goods  which,  sales  tax  paid,  cost  him  $102.50  to  $103.50 
would,  without  the  tax,  cost  only  $100.  But  as  a  matter  of  fact 
the  sales  tax  encourages  thrift  and  eliminates  the  23  per  cent 
which  the  operation  of  the  excess-profits  tax  now  loads  on  many 
commodities.  Therefore  the  net  result  of  a  moderate  general 
sales  tax  would  be  a  considerable  reduction  to  the  ultimate 
consumer  in  the  value  of  the  $100  worth  of  goods  in  the  example 
given  above. 

Compared  with  the  merchants'  and  manufacturers'  ordinary 
profits  on  each  turnover  of  goods,  the  I  per  cent  sales  tax  is 
so  small  that  it  was  found,  after  many  years'  experience  in  the 
Philippines,  that  normally  in  ordinary  commercial  transactions 
very  little  attention  was  paid  to  the  tax.  Under  abnormal 
conditions,  where  the  profits  were  larger  than  usual  the  sales 
tax  was  absorbed. 

7.    How  Does  It  Affect  the  Independent  Manufacturer  as 
Compared  With  the  Integrated  Multiple-Process  Concern? 

For  an  intelligent  comprehension  of  this  problem  several  fac- 
tors must  be  considered : 

1.  As  a  rule,  the  integrated  concern  produces  its  own  raw 
material  at  a  minimum  cost  or  pays  less   for  its  raw-material 
purchases  in  bulk  than  do  its  small  competitors. 

2.  It  is  generally  thought  that  the  integrated   concern   be- 
cause  of   its   production   in   bulk,   more   economical   machinery, 
smaller  overhead  expense  per  unit  and  multiple  process   from 
raw  material  to  finished  product,   turns  out  goods  at   a  lower 
cost  than  do  its  smaller  competitors. 

Per  contra  it  is  well  known: 

I.  That  not  all  independent  manufacturers  do  business  on 
a  small  scale,  and 


TAXATION  99 

2.  That  independent  manufacturers  who  specialize  on  cer- 
tain finished  products  are  able  to  compete  successfully  with  the 
bulk  production  of  large  integrated  concerns  manufacturing  the 
same  finished  products. 

3.  That  the  activities  of  many  concerns,  such  as  automobile 
manufacturers,    consist    mainly    in    assembling    parts    manufac- 
tured by  several  integrated  or  independent  concerns. 

For  the  purpose  of  this  argument,  we  are  to  consider  how  a 
i  per  cent  sales  tax  on  final  output  affects  (i)  a  large  integrated 
concern  with,  say,  six  multiple  processes  between  the  raw  mate- 
rial and  the  finished  product  as  distinguished  from  (2)  a  half 
dozen  independent  concerns,  each  performing  one  of  the  six  mul- 
tiple processes,  performed  by  the  integrated  concern,  and  each 
paying  a  i  per  cent  sales  tax  on  their  output  of  the  partially 
manufactured  product. 

The  natural  assumption  would  be  that  the  six  independent  con- 
cerns among  them  would  pay  six  times  the  amount  of  sales  tax 
that  the  integrated  concern  would  pay  on  the  same  output.  But 
this  assumption  would  be  wrong,  for  the  following  reasons: 

a.  Each  of  the  six  independent  concerns  would  shift  along 
to  the  next  independent  manufacturer  in  line  all  of  the  original 
costs  of  raw  material  plus  the  various  costs  at  that  stage  of  the 
partially  manufactured  product  plus  his  own  profit  and  the  com- 
pound profits  of  the  manufacturers  who  had  preceded  him  and 
add  the  i  per  cent  turnover  tax  to  the  bulk  sum  of  all  these  items. 
The  total  of  these  six  profits  en  route  would  make  the  finished 
product  to  the  ultimate  consumer  several  times  the  amount  for 
which   the   first   independent   manufacturer   purchased   the    raw 
material.     Therefore,  instead  of  6  per  cent — i  per  cent  on  each 
turnover — the  tax  content  of  each  dollar  the  ultimate  consumer 
paid  for  a  finished  product  would,  normally,  range  between  2^2 
per  cent  and  3^  per  cent. 

b.  The    integrated,     multiple-process     concern     would     add 
merely  the  cost  of  production  in  each  of  its  processes  to  the 
partially  manufactured  goods  entering  the  next  process  and  add 
to   the   total   cost   its   profit,    together  with    i    per   cent   of   the 
total  sale  price  of  the  finished  product,  which  is  normally  sold 
in   competition   with   and   at   approximately   the   same   price   as 
similar  finished  products  are  sold  by  the  last  one  of  the  six  inde- 
pendent manufacturers. 

Therefore,  the  advantage  which  the  large  integrated  concern 


ioo  SELECTED  ARTICLES 

would  have  over  each  of  the  independent  concerns  would  be  from 
y$  to  }£  of  i  per  cent — that  is,  2j4  per  cent  or  3^  per  cent 
divided  by  6.  But  as  independent  manufacturers,  large  and 
small,  have  thrived  and  continue  to  thrive  alongside  of  large 
integrated  multiple-process  concerns  the  natural  assumption  is 
that  they  will  continue  to  thrive,  regardless  of  a  fraction  of  i  per 
cent  advantage.  Whether  this  advantage  will  be  used  is  doubt- 
ful. So  far  the  large  concerns  have  shown  no  disposition  to 
drive  their  small  competitors  out  of  business.  No  doubt  the 
large  manufacturer  is  more  than  satisfied  to  allow  his  small 
competitor  to  set  the  price. 

Logically  competition  and  the  sales  tax  would  result  in  an 
increase  of  i  per  cent  or  2  per  cent  or  3  per  cent  to  the  ulti- 
mate consumer,  and  the  repeal  of  the  excess-profits  tax  would 
result  in  a  decrease  to  the  ultimate  consumer  of  several  times 
that  amount.  As  for  the  small  independent  manufacturer  and 
the  large  integrated  multiple-process  concern,  they  should  con- 
tinue in  the  future,  as  they  have  in  the  past,  to  operate  along- 
side of  each  other. 

The  following  table  shows  how  a  year  ago  a  suit  of  men's 
clothing,  retailing  at  $60,  would  increase  in  value  from  the 
raw  material  to  the  finished  product. 

By  the  way,  if  the  same  suit  of  clothes  were  manufactured 
today,  with  wool  at  its  present  price,  there  would  be  a  differ- 
ent result  from  that  shown  by  this  table: 

i  per  cent  tax. 

1.  Raw  wool  in  grease,  about  $6.50    $0.065 

2.  Wool  dealer  scours  wool  and  sells  to  spinner,  $8 08 

3.  Spinner    converts    into    yarn    and    sells  yarn   to    the    manufac- 

turer  $10    IO 

4.  Manufacturer    weaves    and    finishes    into    cloth    and    sells    3% 

yards   at   $4    J333 

5.  Trimmings,  linings,  etc.,  50  per  cent  of  cloth 1891 

6.  Tailor  makes  into  suit  and  sells  at  $40    40 

7.  Suit  is  sold  at  retail   for  $60   60 

Total  tax  price  on  consumption   $1.5674 

If  the  sales  tax  bill  becomes  a  part  of  the  revenue  laws  of  our 
country  Congress  can  repeal  not  only  the  items  provided  for  in 
the  bill  as  presented  by  me,  but  can  repeal  all  of  the  irritating, 
nagging,  discriminatory  taxes  amounting  to  hundreds  of  mil- 
lions of  dollars,  and  the  excess-profits  tax,  the  result  of  which 
has  worked  such  havoc  with  the  business  concerns  of  our 


TAXATION  101 

country,  which  have  in  many  cases  been  compelled  to  pay  the 
excess-profits  tax  on  paper  profits. 

I  have  received  a  few  letters  of  complaint  against  a  general 
turnover  tax  from  concerns  doing  business  on  an  average  of 
2  per  cent  to  3  per  cent  profit  on  their  turnover  sales  and 
claiming  that  if  the  I  per  cent  sales  tax  is  imposed  it  would 
ruin  their  business.  Perhaps  in  some  cases  the  imposition  of 
the  tax,  if  it  had  to  be  paid  by  the  merchant,  would  seriously 
cripple  their  business ;  but  such  concerns  must  understand  that 
the  tax  imposed  is  to  be  paid  by  the  purchaser.  It  is  to  be 
added  to  the  regular  price  charged  for  all  goods  sold.  If  the 
merchant  desires  to  absorb  the  tax  there  is  no  objection  to  his 
doing  so,  but  the  law  does  not  contemplate  any  such  result. 

Some  day  not  far  distant  America  will  have  a  general  sales 
tax  law;  and  with  new  forms  of  pensions  and  bonuses  that  will 
become  a  heavy  drain  upon  the  Treasury,  together  with  the 
2^2  per  cent  sinking  fund  for  retirement  of  the  public  debt  and 
nearly  $1,000,000,000  of  interest  to  be  paid  annually  upon  the 
Government  obligations,  the  sooner  a  general  sales  tax  bill  is 
enacted  into  law  the  better  it  will  be  for  America. 

Congressman  Mondell  repeatedly  announces  that  the  House 
of  Representatives  will  demand  a  lifting  of  taxes  and  not  a 
shifting  of  them.  I  want  both  a  lifting  and  a  shifting  of 
taxes,  and  I  know  the  American  people  want  the  same.  The 
expression  "consumption  taxes"  scares  the  politician  much 
more  than  it  does  the  American  taxpayer.  Every  internal  tax 
imposed  is  a  consumption  tax.  The  demagogic  cry  of  the 
unloading  of  the  taxes  now  supposedly  placed  on  the  shoulders 
of  the  rich  onto  all  the  working  population  of  the  United  States 
through  a  sale  tax  on  goods,  wares,  and  merchandise  is  a 
theory  and  not  a  fact,  and  theories  never  have  and  never  will 
be  accepted  as  payment  for  taxes  that  must  be  collected  to 
maintain  the  Government.  I  declare  in  the  most  positive  terms 
that  it  is  such  people  of  the  United  States  that  are  now  paying 
the  taxes,  and  it  will  continue  so  no  matter  in  what  form  the 
tax  is  imposed,  unless  it  be  a  tax  taking  part  or  all  of  the 
capital  or  property  of  certain  classes  of  citizens. 

Many  of  the  taxes  imposed  under  the  present  revenue  laws 
are  disguised  and  heavily  inflated  consumption  taxes,  and  when 
finally  paid  by  the  consumer  result  in  an  ever-rising  cost  of  the 


102  SELECTEE)   AkTlCLES 

necessities  of  life.  They  have  promoted  extravagance  and 
inflation,  restricted  competition,  obstructed  the  development  of 
our  natural  resources,  discriminated  between  taxpayers,  and  are 
next  to  impossible  to  administer. 


BRIEF  FILED  WITH  THE  TAX  COMMITTEE  OF 

THE  NATIONAL  INDUSTRIAL  CONFERENCE 

BOARD  x 

Recognizing  that  the  fundamental  causes  for  existing  high 
prices  and  high  wages  are  currency  and  credit  inflation  and  the 
destruction  of  property  of  every  character  through  war,  and 
that  social  and  industrial  unrest  are  a  consequence,  as  those 
symptoms  usually  accompany  periods  of  inflation,  the  remedy 
lies  in  a  higher  interest  rate  and  more  discriminating  loaning 
of  funds  by  bankers  and  an  increase  in  productive  effort  by 
the  people  to  promote  deflation  in  the  direction  in  which  the 
inflation  has  been  caused  by  the  factors  referred  to. 

Another,  however,  and  major  contributing  cause  to  the 
present  exalted  prices  and  high  cost  of  living  is  the  method  of 
Federal  taxation,  whether  in  the  form  of  excess  profits  tax 
on  corporations  or  the  heavy  surtaxes  on  the  income,  particularly 
the  earned  income,  of  individuals,  both  having  exactly  the  same 
relation  to  and  effect  in  causing  high  prices,  and  the  measure 
of  inflation  due  to  such  taxes  can  only  be  removed  by  a  change 
in  our  method  of  taxation. 

To  first  indict  the  existing  method  so  that  we  may  determine 
what  to  avoid  and  what  to  seek: 

It  bases  the  bulk  of  the  government  revenue  on  something 
highly  variable  and  intangible — profits  and  income. 

It  is  not  producing  sufficient  revenue  at  present,  and  is  likely 
to  produce  less  in  the  future. 

See  reply  to  IT.  S.  Steel  Corp.  showing:  Federal  tax  1918  $274,000,000; 
Federal  tax  1919  $52,000,000;  loss  of  revenue  to  government  $222,000,000; 
only  partly  accounted  for  by  difference  in  rate. 

The  high  surtaxes  on  individual  incomes  are  driving  those  of 
large  income  into  tax  exempt  securities. 

The  buying  of  municipal  bonds  and  like  securities  on  a  large  scale  is 
diverting  capital  from  necessary  productive  enterprises  into  channels  where 
only  further  waste  and  extravagance  is  being  created. 

The  rapidly  rising  surtaxes  on  all  but  the  most  moderate 

1  By  Charles   E.   Lord,  April   16,  1920. 


TAXATION  103 

incomes  is  preventing  the  accumulation  of  savings  available 
for  investment  in  the  further  expansion  of  productive  enter- 
prises. 

It  discourages  competition.  No  man  is  going  into  a  new 
enterprise  unless  there  is  a  chance  for  a  profit  which  more  than 
offsets  the  risk.  He  knows  today  that  if  there  is  a  high  profit 
the  government  takes  perhaps  half  of  it  in  taxes,  while  if  the 
venture  is  unsuccessful  he  must  bear  all  of  the  loss  himself. 

Those  already  in  business  are  content  to  keep  on  because  the  fea- 
tures of  the  tax  by  discouraging  competition  and  eliminating  supplies 
enables  existing  concerns  to  pass  the  tax  along  to  the  consumer. 

The  utilization  of  natural  resources  is  penalized,  as,  for  one 
thing,  the  cutting  of  timber. 

An  individual  who  bought  timber  land  a  few  years  ago  for  $100,000 — 
$50,000  on  mortgage  and  $50,000  capital  investment — and  whose  timber 
if  cut  might  now  bring  $400,000,  cannot  cut  it  without  paying  a  large 
portion  of  the  profit  to  the  government  in  taxes,  while  so  long  as  the 
timber  stands  uncut  he  pays  no  tax. 

It  encourages  extravagance  in  business  conduct,  high  salaries, 
wasteful  methods,  unnecessary  expense,  because  the  money  saved 
by  care  in  these  matters  would  be  largely  taken  away  in  taxes. 

Careful  management  is  no  longer  able  to  reap  its  customary  reward. 

It  favors  overcapitalized  and  extravagantly  managed  business 
as  against  the  conservatively  capitalized  and  carefully  managed 
one. 

It  is  costly  to  collect,  expensive  alike  to  the  government  and 
the  taxpayer,  and  withdraws  from  productive  employment  tens 
of  thousands  of  clerks  and  accountants  at  a  cost  of  millions  of 
dollars. 

It  rests  unfairly  as  between  taxpayers  and  works  injustice 
and  creates  a  sense  of  bitterness  and  wrong. 

Consider  three  men,  A,  B  and  C,  all  receiving  the  same  income  in  a 
given  year  and  paying  the  same  amount  of  taxes.  "A"  is  an  inventor, 
who  perhaps  after  several  years  of  struggling  has  finally  succeeded  in 
interesting  capital  and  selling  his  invention  for  $200,000.  He  pays  the 
government  between  surtaxes  and  normal  tax  nearly  one-half  the  amount 
received,  and  has  parted  with  his  invention,  the  thing  which  brought  him 
so  big  a  return  in  one  year.  "B"  is  a  business  man  who  on  a  capital 
of  $500,000  employed  in  a  business  with  a  rapid  turnover  has  made  $200,000 
and,  as  in  the  instance  of  the  inventor,  paid  almost  half  of  it  in  taxes. 
"C"  is  a  capitalist  with  *4, 000,000  capital  invested  at  5  per  cent,  realizing 
an  income  of  $200,000  without  personal  effort  and  paying  the  same  tax 
as  "A"  and  "B."  At  the  end  of  the  year  "A"  has  parted  with  his  in- 
vention; "B"  has  added  slightly  to  his  capital  and  still  must  bear  the 
risks  of  business;  while  "C,"  the  wealthiest  of  the  three,  remains  with 
his  capital  unimpaired  in  a  position  to  keep  on  earning  him  the  same 
amount  of  income. 

Because  of  its  character  and  also  because  it  is  an  undeter- 
mined and  indefinite  tax  it  unduly  increases  the  price  of  com- 
modities. 


104  SELECTED   ARTICLES 

A  manufacturer  or  merchant  has  to  consider  these  factors:  Federal 
taxation,  depreciation,  dividend  or  profit,  and  reserve,  all  of  which  must 
be  covered  in  the  margin  between  cost  and  selling,  and  so  each  factor  has 
its  influence  in  fixing  prices.  At  present,  doing  business  on  an  inflated 
basis  has  an  element  of  unusual  risk,  and  larger  reserves  than  usual  are 
required  if  the  merchant  is  to  remain  solvent  and  meet  his  obligations 
during  the  period  of  deflation.  The  effort  to  build  up  such  reserves, 
however,  is  met  by  the  factor  of  taxes,  which  increase  with  the  profit, 
so  that  in  order  to  get  an  adequate  reserve  he  must  be  prepared  to  pay 
a  heavy  tax,  the  addition  of  which  broadens  the  apparent  margin  of 
profit  and  lifts  prices  markedly  without  any  net  improvement  to  the  mer- 
chant except  a  slightly  larger  insurance  against  a  very  definite  risk. 

It  tends  to  perpetuate  and  accentuate  the  present  inflated 
situation. 

It  keeps  the  taxpayer  at  all  times  from  three  to  fifteen 
months  in  debt  to  the  government. 

There  exists  today  a  fear  among  business  men  of  a  bad  year  following 
a  good  year  with  the  heavy  taxes  incurred  by  the  profits  of  the  good  year 
having  to  be  met  out  of  the  meagre  returns  of  the  succeeding  poor  year 
with  the  additional  possibility  that  such  profits  of  the  preceding  year  may 
have  been  subsequently  very  large  swallowed  up  by  losses. 

It  is  un-American  in  principle  in  that  it  seeks  to  make  one 
citizen  pay  more,  proportionately,  than  his  neighbor,  and  attempts 
to  tax  endeavor  for  the  purpose  of  rewarding  those  who  do 
not  make  endeavor,  and  so  creates  special  privilege. 

Why  was  such  a  method  of  taxation  adopted?  I  should 
say,  partly  because  under  the  sudden  emergency  of  war  the 
existence  of  a  moderate  income  tax  provided  the  machinery  for 
increasing  the  burden  so  as  to  raise  a  very  large  revenue.  The 
means  was  at  hand  and  was  used.  The  emergency,  however,  is 
past  and  we  should  promptly  discard  a  theory  of  taxation  which 
is  both  so  uncertain  and  working  so  many  evil  results,  and 
should  seek  a  method  which  will  be  surer  in  its  incidence,  more 
equitable  in  its  operation,  simpler  in  its  collection  and  one  which 
will  tend  to  inflate  the  cost  of  living  and  take  from  the  con- 
sumer a  sum  far  in  excess  of  what  the  government  receives  in 
taxes. 

Can  such  a  way  be  found?  Certainly;  as  soon  as  we  corn- 
menace  to  tax  what  people  spend  instead  of  what  they  save,  we 
are  on  the  right  road.  The  physical  activities  of  the  world 
are  reflected  in  buying  and  selling,  which  always  goes  on.  Tax 
the  turnover  by  taxing  sales,  and  you  are  taxing  something 
more  substantial  than  profits  or  income.  You  are  at  the  same 
time  lifting  the  burden  which  is  stifling  competition  and  prog- 
ress, and  the  wasteful  flow  of  capital  into  tax  exempt  secur- 
ities will  be  stopped  and  diverted  into  productive  enterprises. 

If  any  object  that  under  such  a  method  a  certain  character 


TAXATION  105 

of  income  should  still  be  taxed  as  such,  then  let  surtaxes  rest 
against  that  portion  of  income  which  is  unearned,  as  interest, 
and  free  the  part  which  comes  from  work  or  service. 

Under  a  consumption  tax,  the  man  of  humble  circumstances  pays  little 
as  he  buys  little,  and  every  citizen  should  contribute  something  toward 
the  support  of  his  government,  while  as  the  scale  of  living  rises  the  tax 
burden  becomes  greater  as  more  money  is  spent  for  things  represented 
by  sales  which  are  taxed.  There  is  a  rough,  elemental  justice  in  that. 
The  proper  way  to  reach  evils  in  corporate  management  or  bad  practices 
is  under  our  present  laws  or  laws  directed  against  those  specific  things 
and  not  through  attempted  punitive  taxation,  which  falls  alike  on  the 
just  and  the  unjust. 

The  success  of  a  sales  tax  in  operation  depends  largely  on 
whether  levied  in  a  simple  or  complex  form. 

Among  the  considered   forms  are: 

A  tax  of  a  varying  percentage,  according  to  stages  of  manu- 
facture. 

A  method  needlessly  complicated  in  attempting  to  make  adjustments 
where  none  are  necessary. 

A  tax  of  a  higher  percentage  against  the  sales  of  some  one 
class  of  traders,  as  all  manufacturers  or  all  retailers. 

Such  a  tax  lends  itself  more  readily  to  being  added  to  or  loaded 
into  prices  because  of  the  operation  of  percentage  figuring  of  profits. 

A  tax  levied  against  the  sale  of  certain  articles  or  articles 
over  a  certain  price. 

Open  to  the  objections  and  annoyances  of  the  present  so-called  luxury 
taxes,  and  a  poor  producer  of  revenue. 

A  tax  to  be  collected  by  the  vendor  from  the  purchaser. 
Involving  the  merchant  in  a  vast  amount  of  labor  and  accounting  and 
annoying   to    the    consumer. 

A  stamp  tax  against  sales. 

Easy  and  economical  of  collection  by  the  government  but  open  to 
the  same  objections  as  any  tax  collected  by  the  vendor. 

A  tax  upon  sales  of  real  estate. 

Open  to  the  objection  that  such  a  tax  may  be  a  confiscation  of  capital 
in  a  certain  class  of  transactions,  as  a  man  has  a  small  farm  which  cost 
him  $10,000  and  which  he  is  forced  to  sell  for  $9.000.  To  tax  the  sale 
would  mean  a  further  depreciation  of  the  owner's  already  impaired 
capital. 

A  tax  of  a  small  percentage,  as  i  per  cent,  on  all  sales  of 
commodities  from  producer  to  consumer  levied  against  gross 
sales  as  recorded  on  the  dealer's  books. 

I  favor  the  latter  method  and  would  outline  a  form  for  the 
levy  roughly  as  follows: 

i.  That  there  be  and  is  hereby  levied  upon  each  and  every 
business  involving  the  sale  of  any  commodities  or  merchandise 
manufactured,  produced  or  purchased  by  the  vendor  for  sale,  a 
tax  equal  to  i  per  cent  of  the  gross  sales  of  such  business.  A 


io6  SELECTED   ARTICLES 

return  of  such  tax  shall  be  made  and  the  tax  paid  monthly  on 
the  fifth  day  of  each  calendar  month  on  the  gross  sales  of  the 
preceding  calendar  month,  or,  if  in  any  such  calendar  month 
such  gross  sales  shall  be  less  than  $1,000  the  return  shall  be 
made  and  the  tax  paid  on  the  fifth  day  of  the  first  month 
succeeding  the  month  or  months  the  gross  sales  of  which  shall 
equal  or  exceed  $1,000  on  the  gross  sales  of  such  month  or 
months. 

2.  The  term  business  shall  not  apply  to  any  isolated  trans- 
action less  than  $1,000  nor  to  the  occupation  of  street  vending 
or  peddling  unless  the  gross  sales  therefrom  shall  exceed  $100 
per  month. 

3.  The  term  gross  sales  means  the  aggregate  prices  on  sales 
made  during  the  period,  less  prices  of  any  prior  sales  cancelled 
or   of   goods   returned   during   such   period. 

This  should  have  the  usual  penal  clause  for  failure  to  make 
a  return  and  should  be  accompanied  by  a  repeal  of  the  excess 
profits  tax  on  corporations,  so  much  of  the  individual  income 
surtaxes  as  apply  to  earned  income  and  a  readjustment  of  the 
rate  of  the  normal  tax  as  applied  to  corporations  and  the  rate 
or  exemption  of  the  normal  tax  as  applied  to  individuals. 

As  to  its  productivity,  a  tax  of  I  per  cent  on  the  turnover 
of  commodities  should  produce  over  $2,000,000,000.  This  figure 
agrees  with  calculation  made  by  the  Actuary  of  the  Treasury. 

This  amount  should  offset  the  excess  profits  tax,  which  would  scarcely 
cross  $1,000,000,000,  and  the  surtaxes  on  earned  incomes.  The  adoption 
of  the  principle  is  the  essential  thing.  If  some  reduction  in  the  surtaxes 
applied  to  unearned  incomes  is  to  be  effected,  the  rate  of  sales  tax  can  he 
increased  fractionally  beyond  i  per  cent  or  by  a  moderate  increase  in 
the  normal  tax. 

The  difficulty  involved  in  defining  what  constitutes  earned 
and  unearned  income  can  be  met  in  several  ways.  One  way  is 
to  define  in  the  tax  bill  certain  classes  of  income  as  taxable 
without  the  use  of  the  words  "earned"  or  "unearned."  Another 
way  is  to  make  the  unearned  income  define  itself  by  applying 
the  measure  of  6  per  cent  to  the  capital  of  the  taxpayer  to 
indicate  the  proportion  of  unearned  income,  applying  the  surtax 
in  the  manner  suggested  in  the  margin  note. 

Retain  the  present  surtaxes  or  adopt  new  surtaxes  and  provide  that 
the  taxpayer  may  at  his  option  by  declaring  the  amount  of  his  capital  and 
his  income,  including  the'  portion  which  is  at  present  tax  exempt  be  re- 
lieved of  any  surtax  liability  beyond  the  amount  represented  by  6  per 
cent  on  the  surtax  rate  of  his  entire  income  applied  to  his  capital.  Illus- 
tration: Given  a  capital  of  $500,000  and  an  income  of  $100,000,  take  first 
the  surtax  on  $100,000,  which  is  $23,510,  or  equal  to  2j,Vz  per  cent  on 
the  income,  and  6  per  cent  of  that  gives  1.41  per  cent  which  applied  to 


TAXATION  107 

the  capital  of  $500,000  amounts  to  $7,050  as  the  total  surtax.  Prove  the 
result  by  taking  6  per  cent  of  $500,000,  which  is  $30,000,  and  you  will 
find  that  $7,050  represents  just  23^  per  cent  of  that  amount,  so  that  the 
portion  of  the  $100,000  income  which  is  not  earned  by  effort,  or  $30,000, 
bears  the  full  present  surtax  of  23^3  per  cent,  while  the  rest  of  the  In- 
come, which  represents  effort,  escapes  with  only  the  normal  tax. 

The  cumulative  effect  of  a  I  per  cent  tax  on  sales  all  along 
the  line  from  producer  to  consumer  can  hardly  reach  3  per  cent 
on  the  retail  price. 

In  its  early  stages,  as  raw  material  or  partly  manufactured,  the  tax 
represents  but  a  small  fraction  of  i  per  cent  of  the  value  of  the  finished 
article. 

For  this  same  reason,  the  tax  difference  between  two  manufacturers, 
one  who  conducts  several  processes  in  his  own  plant  and  another  who 
buys  his  raw  material  partly  manufactured  is  apt  to  be  not  greater  than 
Vz  of  i  per  cent  of  the  value  of  the  finished  article,  a  difference  slight 
in  comparison  with  already  existing  differences. 

Such  a  tax  would  lie  against  the  sales  of  a  vendor  (easily 
determined)  with  no  compulsion  upon  the  vendor  to  collect 
from  someone  else.  The  government's  interest  lies  in  the 
collection  of  the  tax.  It  has  no  concern  in  the  fact  that  one 
taxpayer  may  absorb  it  while  another  passes  it  along  or  in  any 
apparent  inequalities  between  them  arising  out  of  the  two 
methods. 

A  sales  tax  of  this  character  meets  the  objections  raised 
against  the  present  method: 

It  bases  a  large  portion  of  the  government  revenue  on  some- 
thing more  tangible  than  profits  and  income. 

It  will  produce  sufficient  revenue. 

It  is  manifest  that  once  a  tax  on  sales  is  in  operation  and  producing 
a  given  amount  that  as  the  needs  of  the  government  decrease  the  rate 
of  the  tax  may  be  lowered;  while  should  a  sudden  need  arise  for  more 
revenue,  as  in  the  instance  of  a  foreign  war,  a  moderate  increase  in  the 
rate  of  the  tax  would  produce  it. 

It  will  curb  the  tendency  of  capital  to  seek  tax  exempt 
securities. 

It  permits  the  accumulation  of  savings  for  future  industrial 
expansion. 

It  will  tend  to  restore  competitive  conditions  and  opportunity 
for  initiative. 

By  removing  the  prospective  taxation  of  profits  and  restoring  the  ven- 
ture to  the  ordinary  elements  of  risk. 

It  will  promote  the  utilization  of  natural  resources. 

The  timber  may  be  cut  without  penalty,  the  invention  put  to  work,  etc 

It  will  encourage  business  thrift  instead  of  waste,  as  high 
salaries  and  extravagances  can  no  longer  be  charged  off  against 
taxes. 

It  removes  the  tax  advantage  at  present  enjoyed  by  over 
capitalized  concerns. 


io8  SELECTED  ARTICLES 

It  is  simple  in  its  collection  and  auditing  for  both  government 
and  taxpayer. 

It  is  a  very  easy  matter  for  any  individual  or  business  house  to  re- 
port sales.  A  very  brief  form  should  suffice,  giving  the  gross  sales  for 
the  month,  or  period  defined,  less  returns  and  allowances. 

It  rests  fairly  as  between  citizens.  The  one  who  consumes 
the  most  and  spends  the  most  pays  the  most  in  taxes. 

It  should  not  increase  the  price  of  commodities  beyond  the 
amount  of  the  tax  itself,  and  it  tends  to  be  absorbed  by  the 
purveyor. 

It   should   work   to   reduce   prices   markedly. 

Several  government  authorities  have  admitted  that  the  existing  method 
of  taxation  has  led  to  a  loading  of  prices  to  the  extent  of  25  per  cent, 
a  large  part  of  which  does  not  reach  the  government.  The  substitution 
of  a  definite  sales  tax  for  an  undetermined  tax  on  profits  should  reduce 
the  tax  load  to  approximately  3  per  cent,  all  of  which  goes  to  the  gov- 
ernment, and  so  save  the  consumer  a  large  sum. 

It  brings  the  collection  of  a  major  part  of  the  revenue,  that 
from  a  tax  on  sales,  up  to  date. 

Will  in  a  comparatively  short  time  end  the  load  of  back  taxes  hanging 
over  the  community. 

It  is  based  on  sound,  democratic  principles,  and  by  reaching 
out  into  new  sources  of  revenue  spreads  the  tax  load  out  equit- 
ably and  in  such  manner  as  to  be  easiest  borne  by  all. 

At  present  the  unsuccessful  merchant  escapes  taxation,  while  business 
ability  is  penalized.  Under  a  sales  tax,  all  pay  on  their  sales,  and  there 
is  a  perfect  commercial  adjustment. 

It  enables  every  taxpayer  to  know  what  his  tax  liability  is. 

It  is  surer  in  its  incidence,  simpler  in  its  application,  more 
productive  in  its  results  and  more  economical  in  its  collection, 
and  has  all  the  attributes  of  just  taxation. 

It  also  by  reducing  the  amount  of  revenue  dependent  upon  income  tax- 
ation removes  many  of  the  inequalities  inseparable  from  such  taxation. 

The  principle  of  taxing  incomes  being  a  feature  of  British  practice, 
may  be  adapted  to  British  conditions,  where  the  law  of  entail  is  in  force 
and  where  many  of  the  large  incomes  derive  same  from  'investments  in 
quarters  of  the  globe  which  would  never  contribute  directly  to  the  rev- 
enue of  the  British  Government  except  through  a  tax  levied  against  the 
income  of  the  individual  resident  Briton,  but  there  is  a  very  grave  doubt 
of  the  advisability  of  any  such  form  of  taxation  in  America  where  exist- 
ing fortunes  are  actively  at  work  in  the  development  of  industries  of 
common  benefit. 

In  commercial  operations  under  a  sales  tax  it  will  probably 
be  found  that  prices  of  producers  and  wholesalers  are  considered 
to  be  or  are  quoted  as  plus  tax  and  that  the  amount  of  the 
tax — that  is,  the  I  per  cent,  if  such  is  the  rate — will  be  added 
to  the  bottom  of  the  invoice.  The  retail  merchant,  because  his 
transactions  are  smaller  and  more  individual,  not  desiring  to 
collect  a  specific  tax  on  each  sale,  and  not  being  obliged  to 


TAXATION  109 

make  such  collection  (as  he  is  in  the  instance  of  the  present 
luxury  tax)  will  probably  find  it  most  advantageous  to  treat  the 
tax  as  an  element  of  expense,  adding  same  to  the  percentage 
figure  which  he  uses  as  his  cost. 

Retailers  are  accustomed  to  assembling  items  of  expense,  such  as  rent, 
wages,  advertising,  etc.,  and  to  represent  same  by  a  percentage  figure 
which  they  add  to  the  cost  of  an  article  to  ascertain  their  cost  beyond 
which  to  fix  a  selling  price  showing  some  margin  of  profit.  Say  a  given 
retailer's  cost  of  doing  business  is  24  per  cent  he  might  change  that  figure 
to  25%  per  cent,  including  the  sales  tax  in  his  cost  at  a  rate  to  cover 
the  tax  on  his  selling  price,  which  is  higher  than  the  cost  price  to  which 
the  percentage  has  been  applied. 

It  is  also  possible  that  in  certain  lines  of  business  or  classes 
of  commercial  operations  the  sales  tax,  instead  of  being  added 
at  the  bottom  of  an  invoice,  will  be  covered  by  a  shortening  of 
i  per  cent  in  the  discount  terms. 

As  an  illustration:  goods  customarily  sold  on  terms  of  i  per  cent 
off  30  days  might  be  sold  on  terms  of  net  30  days,  the  seller  absorbing 
the  tax  in  return  for  the  eliminated  discount. 

Sales  taxes  so  adjust  themselves  where  in  operation  and  a 
sales  tax  of  a  small  percentage  would  readily  so  adjust  itself 
and  soon  become  a  matter  of  course,  as  are  at  present  a  great 
variety  of  selling  terms  and  discounts  which  are  in  operation 
in  different  lines  of  trade. 

A  tax  of  a  uniform  percentage  on  sales  of  commodities,  with 
no  distinction  between  classes  of  commodities  or  stages  of 
manufacture  does  not  require  any  adjustment  to  varying  degrees 
of  profit  in  various  lines  of  business  between  different  dealers 
in  the  same  line. 

Whether  the  profit  is  5  per  cent  or  10  per  cent  or  any  other  per- 
centage, the  tax  is  not  upon  the  profit  but  upon  the  sales  and  may  in 
either  event  be  passed  along  and  will  undoubtedly  so  tend  to  pass  along 
in  industries  where  the  margin  of  profit  is  narrow,  while  tending  more  or 
less  to  be  absorbed  in  industries  where  the  margin  of  profit  is  broad. 

I  would,  therefore,  respectfully  recommend  as  a  means 
toward  reform  in  Federal  taxation  that  the  excess  profits  tax 
on  corporations  be  abandoned  and  that  individual  income  sur- 
taxes as  applied  to  earned  income  be  removed,  that  the  normal 
income  tax  upon  corporations  and  individuals  be  revised  either 
as  to  rate  or  exemption,  that  the  surtaxes  upon  unearned  income 
be  applied  only  after  a  somewhat  increased  exemption  beyond 
the  present  $5,000,  and  that  the  bulk  of  the  government  reve- 
nue be  obtained  from  five  sources:  (a)  income  from  customs, 
which  is  now  growing  with  the  increase  in  importations;  (b) 
certain  excise  taxes  of  established  revenue  producing  power; 
(c)  a  tax  on  sales  of  commodities  of  a  percentage  probably  i 


i io  SELECTED   ARTICLES 

per  cent;  (d)  a  normal  tax  on  all  incomes  of  whatever  char- 
acter above  the  exemption;  (e)  surtaxes  upon  unearned  incomes. 
I  would  also  respectfully  recommend  that  in  connection  with 
existing  inheritance  taxes  the  tax  be  levied  against  the  bene- 
ficiary, or  inheritor,  based  on  the  amount  which  he  receives,  but 
collectible  out  of  the  estate  as  a  whole  before  distribution,  in 
place  of  the  present  method  of  levying  the  tax  against  the 
estate. 

Five  hundred  thousand  dollar  estate  left  to  a  widow  and  one  child 
bears  the  heavy  surtaxes  applicable  to  an  estate  of  that  size,  but  the 
hardship  is  not  great,  as  there  are  only  two  heirs,  each  receiving  in  an 
equal  distribution  a  large  amount.  Where  an  estate  of  the  same  amount, 
$500,000,  is  left  by  a  man  of  large  family,  however,  and  divided  among 
a  wife  and  perhaps  six  or  seven  children  and  one  or  two  other  depend- 
ents, the  average  amount  received  by  each  being  about  $50,000,  the  appli- 
cation of  the  surtax  on  the  $500,000  estate  to  each  one  of  these  small 
inheritances  is  a  grave  injustice. 

To  base  the  tax  on  the  amount  inherited  will  restore  equity  and  at 
the  same  time  accomplish  the  useful  social  purpose  of  tending  to  break 
up  and  cause  the  division  of  very  large  estates. 


REPORT    OF    COMMITTEE    ON    TAXATION 
NATIONAL  ASSOCIATION  OF  MANUFAC- 
TURERS x 

War  increased  the  expenses  of  government  tremendously. 
To  meet  these  expenses,  we  not  only  derived  more  revenue 
from  usual  sources,  but  new  revenue  resources  were  discovered, 
most  notable  of  which  were  excess  profits,  a  totally  new  form 
of  revenue. 

The  i8th  Amendment  deprives  the  government  of  an  annual 
revenue  of  some  $500,000,000.  This  demands  that  we  review  and 
revise  our  schedules  to  make  up  this  permanent  deficit,  and 
provide  an  adequate  certain  revenue  for  the  future. 

The  purpose  of  taxation  should  be  to  provide  revenue.  Obvi- 
ously those  forms  which  produce  revenue  for  the  maintenance 
and  operation  of  government  should  be  adequate.  In  this  view 
lies  the  real  danger,  since  it  tempts  us  to  make  certain  emergency 
taxes  the  basis  of  a  permanent  system. 

Temporary  results  are  notably  untrustworthy.  Too  often  they 
mislead  into  a  belief  that  a  system  immediately  successful  will 
remain  continuously  and  permanently  so.  We  continue  it  and 

1  Proceedings  of  the  Twenty-Fifth  Annual  Convention  of  the  National 
Association  of  Manufacturers  of  the  United  States  of  America.  May  17-19, 

IQ2O.      p.     14-22. 


TAXATION  in 

only  after  irreparable  injury  has  been  done  is  it  repealed.  We 
must  remain  alert  to  the  by-products  of  the  systems  we  are 
interested  in.  We  must  search,  uncover,  and  accurately  determine 
the  growing  tendencies  and  certain  defects  obtaining  in  that  sys- 
tem, however  successful  it  may  seem.  If  our  investigation  into 
a  revenue  system  shows  that  the  flood  of  revenue  from  a  particu- 
lar source  endangers  that  source;  if  the  flood  loses  substance  in 
its  tortuous  course  and  merely  trickles  into  the  Federal  Treasury, 
and  if  we  find  it  affecting  seriously  the  very  people  whom  it  was 
designed  to  serve,  we  would  be  loth  to  continue  it. 

Thus  stands  the  record  of  the  excess  profits  tax. 

This  tax  was  adopted  as  a  temporary  measure  to  meet  the 
emergencies  brought  about  by  the  war,  predicated  upon  foreign 
experience.  It  was  serviceable  as  sixth.  We  are  now  endeavor- 
ing to  get  back  on  a  substantial  before-the-war  basis;  we  must 
get  rid  of  all  expediencies  which  tend  to  interfere  with  our  future 
industrial  and  equipment  development. 

Congress  should  devise  a  more  satisfactory  program  of 
taxation,  achieve  an  economically  safe,  sound,  productive  system 
of  revenue — a  system  such  as  will  help  the  government  without 
hampering  industry  and  thereby  help  the  public.  As  such,  the 
excess  profit  tax  will  not  serve.  The  new  tax  must  be  one 
which  will  provide  certain  adequate  revenue  and  yet  insure  indus- 
trial and  public  prosperity. 

Those  who  advocate  the  repeal  of  the  excess  profits  tax 
are  impelled  by  unselfish  motives.  They  are,  for  the  most  part, 
men  who  have  placed  national  welfare  above  selfish  partisan 
interests.  After  a  practical  experience  with  this  tax  and  its 
effect  upon  capital,  upon  labor,  upon  production,  upon  price  and 
the  enormous  expense  in  preparing  tax  returns  and  collecting 
such  a  tax,  they  are  asking  for  a  speedy  appeal  of  this  measure. 

To  mention  some  of  the  objections,  we  find  the  following 
significant  indictments : 

The  excess  profits  tax: 

1.  Deprives    industry    of    the    fruits    of    its    foresight    and 
sagacity. 

2.  It   burdens  brains,   ability  and   energy. 

3.  It   discourages   production. 

4.  It  penalizes  enterprise  and  ingenuity. 

5.  It  interferes  with  the  accumulation  of  industrial  capital 
for  the  development  of  business. 


H2  SELECTEt)   ARTICLES 

6.  It  encourages  wasteful  expenditures. 

7.  It  puts  a  premium  on  over-capitalization  and  a  penalty 
upon  conservative  business  practice. 

8.  It  discourages  new  ventures  and  confirms  old  ventures 
in  their  monopolies. 

This  last  is  particularly  significant.  Since  all  industries  grow 
from  small  beginnings,  they  need  encouragement  and  resources 
in  the  form  of  profits  for  future  development.  But  the  excess 
profits  tax  deprives  industry  of  these  encouragements  and  re- 
sources, repressing  development  and  checking  enterprise  in  its 
very  beginning. 

Again,  the  profits  of  capital  are  the  wages  of  efficient  enter- 
prise. These  profits  are  not  pocketed,  but  are  reinvested  for 
further  development  and  promotion  of  the  enterprise  which 
gives  employment  to  labor.  Therefore,  it  seems  a  mistaken 
policy  to  maintain  a  system  of  taxation  which  disturbs  and 
obstructs  general  prosperity. 

There  is  another  serious  objection  to  the  excess  profits  tax. 
It  operates  as  a  cost  plus  system  and  has  the  same  effect.  It 
induces  waste  and  extravagance  throughout  industry.  It  dis- 
courages efficiency  in  both  the  ranks  of  capital  and  labor. 

As  far  back  as  1776  Adam  Smith  arranged  the  fundamental 
principles  of  a  just  and  useful  tax.  These  maxims  of  taxations 
are:1  (i)  a  tax  ought  to  take  out  of  the  pockets  of  the  people 
as  little  as  possible  over  what  it  brings  into  the  public  treasury. 
It  ought  not  be  eaten  up  in  salaries  of  a  great  number  of  officers, 
(2)  It  ought  not  obstruct  industry  which  gives  maintenance  and 
employment  to  multitudes.  (3)  It  ought  to  be  fair  and,  there- 
fore, not  offer  temptation  to  evade.  (4)  It  ought  to  be  easy  to 
compute  and  to  collect.  Furthermore,  in  a  popular  government, 
any  system  of  taxation  proposed  with  a  view  of  convincing  the 
public  at  large  that  the  tax  burden  imposed  is  paid  by  a  limited 
few  tends  to  demoralizing  and  extravagant  expenditure  on  the 
part  of  government,  the  burden  of  which  ultimately  must  fall 
upon  all  if  the  country  is  to  be  prosperous  and  business  enter- 
prise thrive. 

The  excess  profits  tax  violates  these  fundamental  principles 
of  a  just  and  useful  tax.  The  cost  of  collecting  the  present  tax 
is  about  $40,000,000.  It  is  so  intricate  that  few  understand  it. 
It  represses  industry ;  and  a  variety  of  schemes  have  been  created 

1  For  a  fair  and  exact  statement  of  Adam  Smith's  maxims,  see  Part  I. 


TAXATION  113 

to  evade  it.  It  bears  none  of  the  qualities  of  a  just  and  useful 
tax. 

The  economic  welfare  of  the  country  demands  an  immediate 
repeal  of  the  excess  profits  tax.  But  its  repeal  demands  also 
that  a  satisfactory  substitute  be  found.  This  substitute  tax  must 
have  certain  specific  advantages  of  a  just  and  useful  tax  to  recom- 
mend it  at  this  time.  It  must  produce  adequate  revenue,  must 
be  easily  administered,  must  be  inexpensive,  must  impose  no  un- 
necessary burdens  anywhere,  it  must  discourage  waste  and 
extravagance,  it  must  promote  prosperity. 

At  the  time  of  the  Civil  War  our  government  was  confronted 
by  a  revenue  problem  similar  to  the  present.  It  resorted  to  a 
tax  on  sales  which  was  called  an  excise  tax,  imposed  upon  a 
limited  number  of  commodities. 

It  operated  as  a  tax  on  sales  and  was  very  simple  in  operation. 

In  addition  to  this  excise  tax  there  was  a  special  retailer's 
tax  and  wholesaler's  license  tax  of  $10  and  an  income  tax  of 
5  per  cent.  These  three  taxes  were  paid  annually. 

On  account  of  its  limited  application  and  the  increased  revenue 
derived  from  customs,  this  tax  was  repealed  except  in  the  case 
of  liquors  and  tobacco,  articles  of  luxury. 

We  feel  that  possibly  the  solution  of  the  present  problem 
lies  in  a  carefully  devised  gross  sales  tax.  Such  a  tax  would 
admit  of  many  variations.  But  it  seems  the  most  reasonable 
form  would  be  a  limited  tax  on  turnovers  of  wares,  goods  and 
merchandise. 

Such  a  slight  tax  on  articles  of  wide  consumption  would  have 
small  effect  on  the  resources  of  the  consumer. 

A  tax  of  I  per  cent  on  every  sale  of  beef,  from  the  hoof  to 
the  consumer,  would  produce  an  annual  revenue  of  $60,000,000. 
Yet  it  would  amount  to  little  more  than  J^c.  per  pound  on  the 
purchase  price  to  the  consumer  and  consequently  would  likely 
be  borne  by  the  retailer.  This  same  principle  would  apply  in 
the  same  way  to  many  other  articles  of  wide  consumption.  Still 
it  would  produce  sufficient  revenue  to  obviate  the  excess  profits 
tax,  yet  entail  no  hardship  upon  the  consumer. 

It  seems  impossible  to  secure  at  this  time  any  reliable  figures 
of  gross  sales,  but  the  estimated  gross  sales  for  the  year  1919 
was  approximately  $672,000,000,000  after  the  elimination  of  re- 
turns, allowances  and  intercompany  sales.  A  i  per  cent  sales 
tax  on  this  amount  would  produce  an  annual  revenue  of 


H4  SELECTED   ARTICLES 

$6,720,000,000  which  exceeds  the  amount  called  for  in  the  national 
budget.  More  conservative  estimators  figure  the  gross  sales  as 
$200,000,000,000,  and  even  on  this  basis  a  i  per  cent  tax  would 
yield  a  yearly  tax  of  $2,000,000,000. 

We  would,  therefore,  suggest  that  a  gross  sales  tax  on  all 
sales  of  wares,  goods  and  merchandise  by  individuals,  partner- 
ships and  corporations  and  some  forms  of  public  service  be 
accorded  serious  consideration. 

The  individual,  partnership  or  corporation  should  secure  a 
license  from  the  government  to  entitle  him  to  do  business,  some- 
what along  the  lines  of  the  license  now  granted  to  tobacco 
dealers,  for  which  a  nominal  charge  should  be  made.  This  is 
to  place  on  record  those  engaged  in  business  and  as  a  check  to 
force  tax  returns. 

The  tax  on  sales  would  be  a  tax  on  the  sales  as  recorded  on 
the  books  of  any  individual,  partnership  or  corporation,  large  or 
small,  and  the  exhibits  hereto  appended  show  how  this  would 
be  added  as  a  direct  percentage  in  billing  and  estimating  as  an 
item  of  expense  in  fixing  prices. 

A  simple  form  could  be  prepared  showing  the  net  sales,  elimi- 
nating returns,  allowances  and  intercompany  sales,  this  state- 
ment to  be  executed  by  a  notary  public  or  other  authorized 
official  and  sent  to  the  revenue  office  with  a  check  covering  I  per 
cent  of  the  sales.  This  would  cause  a  steady  flow  of  revenue 
and  overcome  the  necessity  of  the  government  borrowing  money 
except  in  rare  emergencies. 

In  view  of  the  revenue  that  could  apparently  be  derived  from 
a  gross  sales  tax,  we  respectfully  suggest  that  the  present  forms 
of  federal  taxation  be  changed  or  revised  and  that  the  following 
plan  be  given  careful  consideration  in  amending  the  system  to 
deal  more  efficiently  with  the  problems  at  hand: 

1.  A  straight  tax  of  I  per  cent  upon  all  sales  of  goods,  wares 
and  merchandise  by  individuals,  partnerships,  corporations  and 
some  forms  of  public  service  corporations. 

2.  A  normal  tax  of  4  per  cent  on  all  incomes  of  whatever 
character  over  $2,500  for  single  persons  and  $5,000  for  married. 

3.  Income  from  customs. 

4.  Certain    excise    taxes    of    established    revenue-producing 
power. 

We  believe  this  gross  sales  tax  would  be  a  just,  certain  and 
adequate  source  of  revenue. 


TAXATION  115 

1.  It  will  be  fairly  distributed  over  a  great  mass  and  through 
the  year  so  as  to  be  scarcely  noticeable. 

2.  It  will  reach  many  who  should  pay  taxes  but  who  now 
escape  them. 

3.  It  would  be  definite  and  easily  ascertainable. 

4.  It   could   be   collected   monthly  or   quarterly. 

5.  Excess  profits  tax  is  unproductive  during  a  depression; 
while  the  gross  sales  tax  is  certain  at  all  times. 

6.  Competition   will    automatically   safeguard   the    consumer 
against  tax  profiteering. 

7.  It  would  not  be  discriminatory;   it  would  be  fair  to  all 
businesses. 

8.  It  will  tempt   free   capital  now   driven   into  non-taxable 
securities  to  liberal  investment  in  productive  industry. 

This  tax  would  give  to  business  the  stimulus  it  now  needs  and 
would  help  put  economic  America  on  a  substantial  basis  and  go 
far  toward  promoting  permanent  prosperity. 


AN  INCOME  TAX  LESSON1 

More  or  less  startling  newspaper  headlines  have  recently 
announced  the  fact  that  sixty-five  individuals  reporting  taxable 
income  for  the  calendar  year  1919  filed  returns  showing  income 
of  $1,000,000  or  more.  This  fact,  stated  by  itself,  may  loom 
large  in  the  popular  estimation.  It  seems  to  convey  an  idea  of 
vast  wealth  in  the  hands  of  a  few.  The  headlines  failed  to 
point  out  that  for  the  calendar  year  1916  the  income  tax  returns 
disclosed  income  of  $1,000,000  or  more  for  two  hundred  six 
individuals.  In  other  words  between  1916  and  1919  there  was 
an  elimination  of  one  hundred  forty-one  taxable  incomes  of 
$1,000,000  or  more. 

In  1916  the  records  show  that  three  hundred  seventy-six 
persons  reported  income  of  between  $500,000  and  $1,000,000,  while 
in  1919,  the  reports  included  only  one  hundred  eighty-nine.  The 
decline  in  the  number  of  large  incomes  continues  down  to  the 
record  of  income  from  $150,000  to  $200,000,  of  which  there  were 
1,284  returned  for  1916  and  1,092  for  1919.  Incomes  less  than 
$150,000  showed  uniform  increases  from  1916  to  1919. 

Does  this  mean  that  the  very  rich  are  getting  poorer  and  the 
comparatively  poor  are  getting  richer?  Not  necessarily  by  any 

JWall   Street   Journal.    July  27,    1921. 


no  SELECTED   ARTICLES 

sane  accounting.  It  chiefly  means  that  the  incidence  of  high 
surtax  rates  since  1916,  in  the  effort  to  tax  the  very  rich  dispro- 
portionately, has  driven  reinvestment  of  income  of  the  very  rich 
out  of  business  channels  into  tax-exempt  securities.  It  means 
that  the  extremely  rich  prefer  to  invest  in  4  per  cent  or  5  per 
cent  tax-exempt  municipal  and  state  securities  rather  than  invite 
the  trouble  and  risk  of  embarking  in  business  enterprises  that 
must  yield  17  per  cent  or  more  in  order  to  be  equivalent  to  a 
4  per  cent  tax-exempt  investment. 

In  1916,  the  income  reported  in  excess  of  $150,000  was 
$1,498,832,392,  comprised  in  3,833  returns.  In  1919,  the  reported 
income  in  excess  of  $150,000  had  shrunk  to  $811,160,125,  com- 
prised in  2,543  returns— a  decline  of  $687,672,267  in  income  and 
of  1,290  returns. 

This  shrinkage  was  not  due  to  hard  times,  for  1919  was 
notoriously  a  better  year  than  1916.  One  indication  of  this  is 
that  net  returns  by  individuals  with  $3,000  to  $150,000  income 
showed  $12,411,931,807  in  1919  as  against  $4,709,745,228  in  1919, 
an  increase  of  $7,612,186,579.  The  returns  of  $3,000  to  $150,000 
incomes  in  1919  numbered  1,835,604,  while  the  number  in  1916 
was  only  433,203. 

In  the  face  of  this  general  display  of  increased  prosperity  it 
is  absurd  to  assume  that  the  very  rich  did  not  share  with  the 
rest  of  the  community  in  an  enlargement  of  income.  Neither 
is  it  conceivable  that  returns  were  falsified  by  the  wholesale 
as  soon  as  income  passed  the  $150,000  mark.  The  simple  answer 
is  that  the  high  surtax  rates  defeated  their  own  purpose.  Instead 
of  taking  toll  from  the  very  rich,  as  they  were  designed  to  do, 
they  drove  wealthy  investors  out  of  the  business  field  into  non- 
taxable  investments. 

The  moral  is  equally  obvious.  Surtax  rates  must  be  reduced 
to  a  point  where  they  will  not  kill  the  geese  that  should  lay 
golden  eggs  for  the  support  of  government,  and  an  end  should 
promptly  be  put  to  the  constant  enlargement  of  the  tax-exempt 
pasture. 


BRIEF  EXCERPTS 

For  one  hundred  fifty  years  this  country  subsisted  on  con- 
sumption taxes.    They  were  the  only  kinds  that  we  paid.    I  refer 


TAXATION  117 

to  the  taxes  collected  through  the  Custom  House,  and  through 
the  Internal  Revenue  bureaus.  Jules  S.  Bache.  The  Turnover 
Tax— The  Only  Way  Out.  p.  9. 

The  advantages  of  this  tax  would  be  that  it  would  be  equally 
paid  by  everybody  in  the  country,  and  might  lead,  perhaps,  to 
thrift,  since  those  who  wish  to  avoid  paying  taxes  would  only 
have  to  decrease  their  expenditures.  Jules  S.  Bache.  Bache 
Review.  Special  Edition.  April,  1920. 

There  aren't  any  two  general  sales  taxes  throughout  the 
world  which  are  the  same.  In  the  Philippines  all  farming 
products  are  exempted;  in  Canada,  necessities  of  life  are 
exempted;  in  France  numerous  other  things  are  exempted;  and 
so  on.  Edwin  R.  A.  Seligman.  Proceedings  of  the  Second 
National  Industrial  Tax  Conference,  p.  77. 

A  sales  tax,  a  turnover  tax,  is  a  consumption  tax.  As  such, 
it  has  got  to  be  passed  on  to  the  consumer.  If  it  can  not  be 
passed  on,  it  can  not  be  levied.  I  can  see  no  possible  injustice 
to  any  company  by  their  not  being  able  to  pass  the  tax  on  under 
these  conditions,  if  those  conditions  are  provided  for.  A  sales 
tax  is  an  overhead  charge  like  rent,  labor,  clerk  hire,  and  kindred 
expenses.  Jules  S.  Bache.  Hearings  before  the  Committee  of 
Ways  and  Means.  1921.  p.  84. 

The  excess  profits  tax  is  a  consumption  tax  pure  and  simple, 
and  no  possible  device  can  make  it  anything  else.  Practically 
all  taxes  are  consumption  taxes.  I  don't  know  that  Mr.  Rocke- 
feller is  able  to  pass  on  his  73  per  cent,  but  I  know  that  most 
business  men  in  this  country  are  busy  passing  on  their  taxes, 
and  if  they  didn't  succeed  in  doing  it,  many  of  them  would  be 
bankrupt  today.  Jules  S.  Bache.  Proceedings  of  the  Second 
National  Industrial  Tax  Conference,  p.  57. 

A  sales  tax  would  undoubtedly  be  highly  productive  of 
revenue;  it  would,  I  believe,  diminish  the  "loading"  of  prices; 
it  would  be  free  from  the  injurious  effects  of  other  taxes  on 
the  natural  flow  of  capital ;  it  ought  to  be  relatively  simple  of 
collection;  it  would  not  require  the  employment  of  lawyers  and 
accountants  by  the  taxpayer  and  the  irritating  and  worrying 
work  of  grappling  with  intricate  schedules;  it  could  be  paid  as 


ii8  SELECTED   ARTICLES 

it  accrues,  say  at  the  end  of  every  month,  instead  of  being 
ascertainable  only  at  the  end  of  the  year  and  payable  thereafter. 
Otto  H.  Kahn.  Addendum  to  Some  Suggestions  on  Tax  Re- 
vision and  the  Sales  Tax.  p.  26-7. 

Even  if  the  theorist  who  believes  in  levying  the  bulk  of 
taxation  on  the  man  who  can  most  easily  pay — viz:  the  man 
with  the  largest  income — is  correct  in  his  belief,  his  purpose 
is  defeated  by  the  fact  that  the  man  with  the  large  income 
seeks  the  protection  of  the  tax-exempt  security,  and  leaves  that 
man  to  bear  the  greatest  burden  who,  even  with  heavy  income 
taxes,  is  not  willing  to  become  a  drone,  but  keeping  his  money 
in  commerce  for  his  own  advancement  and  the  up-building  of 
the  country,  does  not  seek  that  protection.  Therefore,  in  this 
country,  I  am  unalterably  opposed  to  the  income  tax  in  any 
shape  whatever.  Jules  S.  Bache.  Address  before  Retail  Mer- 
chants of  Detroit. 

The  sales  tax  is  not  a  novel  tax.  The  Romans  had  it,  not 
to  speak  of  the  Egyptians  and  the  Babylonians.  The  sales 
tax  has  existed  in  one  form  or  another  for  a  great  many  years, 
with  only  two  exceptions,  it  has  been  abolished  everywhere  and 
has  not  been  re-introduced  in  any  first  class  country — and  those 
two  exceptions  are  Germany,  which  re-introduced  it  in  1919,  and 
France,  which  introduced  it  in  1920.  We  can  learn  little  one 
way  or  another,  either  for  or  against  it,  from  Mexico  or  Cuba 
or  the  Philippines  or  Canada,  all  of  which  are  countries  of 
insignificant  economic  proportions,  where  we  do  not  find  the 
real  kind  of  sales  tax  that  we  have  been  discussing  today. 
Edwin  R.  A.  Seligman.  Proceedings  of  the  Second  National 
Industrial  Tax  Conference,  p.  72. 

Our  suxtaxes  go  to  65  per  cent.  There  is  in  addition  8  per 
cent  normal  tax,  making  a  total  maximum  tax  of  73  per  cent. 
It  is  an  extreme  rate  which  I  think  may  fairly  be  said  to  be 
impossible,  impracticable  in  times  of  peace. 

For  the  year  1916,  when  the  tax  rate  was  low,  there  was 
reported  by  taxpayers  having  a  net  income  of  $300,000  over 
$992,000,000  of  net  income.  That  is,  in  1916,  the  year  when  our 
tax  rates  were  relatively  low.  By  1918 — that  is  to  say,  in  two 


TAXATION  119 

years,  and  good  years — the  amount  of  net  income  reported  by 
taxpayers  having  incomes  of  $300,000  or  over  had  fallen  to 
$392,000,000.  It  seems  to  me  the  common  sense  of  the  situation 
indicates  that  we  can  not  successfully  enforce  tax  rates  running 
to  73  per  cent.  Thomas  S.  Adams.  Hearings  before  the  Com- 
mittee on  Ways  and  Means.  1921.  p.  10-11. 

That  the  results  in  question  are  assured  is  proven  by  the 
experience  in  the  Philippines,  where  the  [sales]  tax  has  been  in 
operation  since  1905,  and  where  under  no  circumstances  would 
its  repeal  be  contemplated  for  a  moment,  and  where  an  increase 
in  the  rate  of  from  I  per  cent,  at  which  it  is  now  being  levied, 
to  2  per  cent  is  being  discussed  with  popular  approval,  in 
order  practically  to  abandon  all  other  types  of  taxation. 
In  its  initiation  in  the  Philippines  the  very  same  objections 
were  raised  against  it,  as  are  being  made  here  now.  Mass 
meetings  were  held  and  parades  were  formed  in  antagonism 
to  the  innovation.  Three  months  after  the  tax  had  been  put 
into  operation  and  was  working,  not  a  murmur  was  heard 
against  it,  and  today  a  revolution  would  occur  if  any  attempt 
were  made  to  repeal  it.  Jules  S.  Bache.  The  Turnover  Tax — 
The  Only  Way  Out.  p.  6. 

The  tax  on  retail  sales  paid  by  the  consumer  is  the  most 
disturbing,  irritating  and  altogether  unpopular  method  of  col- 
lecting taxes  perhaps  ever  invented.  It  is  the  mustard  gas  of 
taxation. 

It  is  illustrated  in  the  soda  water  tax,  where,  for  every  isc. 
drink,  the  public  has  to  get  a  little  pink  ticket  and  pay  2c.  more 
for  it — a  most  outrageous  tax;  over  13  per  cent — but  the  annoy- 
ance and  inconvenience  is  almost  worse. 

This  does  not  describe  the  tax  on  gross  sales,  or  turnover. 
In  this  turnover  tax,  the  seller,  not  the  buyer,  pays.  This  is  the 
way  it  would  work : 

The  merchant  or  seller  would  take  from  his  books  once  a 
month  the  total  amount  of  his  sales  and  forward  the  statement 
to  the  collector  with  his  check  for  I  per  cent  of  such  sales. 
This  would  be  the  method  all  along  the  line.  William  C.  Corn- 
well.  An  Intolerable  Situation,  p.  11-12. 


120  SELECTED  ARTICLES 

CONGRESSMAN  WILLIAM  R.  GREEN.  You  think  that  business 
men  know  all  about  the  science  of  taxation. 

MR.  JULES  S.  BACHE.  I  do  not  think  anybody  else  does.  I 
do  not  think  there  is  a  science  of  taxation. 

MR.  GREEN.    You  do  not  think  there  is? 

MR.  BACHE.    No,  sir. 

MR.  GREEN.  I  had  come  to  the  conclusion,  since  you  were 
talking,  that  that  was  your  opinion. 

MR.  BACHE.  I  dispute  the  words  "science  of  taxation." 
There  is  slavery  of  taxation.  Taxation  is  a  burden  which  we 
must  all  bear. 

CONGRESSMAN  HENRY  T.  RAINEY.  Taxation  has  been  defined 
to  be  a  method  of  getting  the  most  feathers  with  the  least 
squawking  of  the  goose. 

MR.  BACHE.  I  agree  to  that.  The  sales  tax  will  do  that. 
There  is  no  tax  in  the  world  that  will  ever  get  so  much  money. 
Hearings  before  the  Committee  on  Ways  and  Means.  1921. 
P.  87. 

I  have  analyzed  the  fiscal  situation  in  a  concrete  way,  and  if 
you  will  permit  me  to  I  would  just  like  to  make  these  three 
observations  regarding  it: 

First.  That  the  $24,000,000,000,  the  real  aftermath  of  the  war, 
represented  by  various  interest-bearing  securities,  really  mean  a 
mortgage  on  each  family  in  America  of  $1,200  if  we  divide  the 
total  debt  among  the  twenty  million  families  constituting  the 
Nation's  population. 

Second.  That  the  annual  carrying  charge  on  that  mortgage 
means  $50  per  family,  or  $10,  on  the  average,  annually,  on  every 
man,  woman,  and  child  in  the  country. 

Third.  If  we  are  to  operate  on  a  $4,000,000,000  appropriation 
or  budget  for  four  years,  as  was  suggested  by  Secretary  Houston, 
that  means  that  every  man,  woman,  and  child  in  this  country, 
on  the  average,  during  each  of  these  four  years  must  somehow 
or  other  provide  $40;  or,  in  other  words,  each  American  family — 
a  family  consisting  of  five  members  in  accordance  with  the 
familiar  census  type — would  somehow  or  other  have  to  manage 
to  provide  $200  per  year  to  meet  the  fiscal  requirements  of  the 
country.  /.  /.  Klein.  Hearings  before  the  Committee  on  Ways 
and  Means.  1921.  p.  69-70. 


TAXATION 


121 


Federal  revenue  from  all  forms  of  internal  taxation  in  the 
fiscal  year  1921,  which  ended  July  I,  decreased  $812,579,486, 
compared  with  the  government's  internal  taxation  receipts  the 
year  before.  This  was  disclosed  today  by  a  preliminary  report 
from  D.  H.  Blair,  commissioner  of  internal  revenue,  to  the 
secretary  of  the  treasury. 

Commissioner  Blair's  report  shows  that  collections  from  in- 
come and  excess  taxes,  which  constitute  almost  three-fourths  of 
the  internal  taxation  yield,  decreased  more  than  $700,000,000. 

A   recapitulation  of  the   internal   revenue   receipts   from   all 
tax  sources  for  the  fiscal  year  1921  follows: 
Tax  Sources  1920 

Income    and    profits    $3,956,934,499 


Estates     103,635,563 

Transportation  and  insurance    307,769,841 

Beverages    197,332,105 

Tobacco     294,777,05 1 

Admissions   and    dues    81,918,556 

Excises     267,882,602 

Capital   stocks,   etc 105,479,925 

Stamp    taxes    84,347,827 

Child   labor    employment    2,380 

Miscellaneous,  including  national  prohibition.  7,499,898 


1921 

$3,225,790,653 
154.039,902 
320,504,167 
141,295,508 
253,990,016 
95,882,345 
229,331,657 
92,446,376 
72,468,013 
24,223 
9,237,900 


Total  $5,407,580,251   $4,595,000,765 

Cleveland  Plain   Dealer.     August  29,   1921. 

The  collection  of  internal  revenue  taxes  for  the  fiscal  year 
1920  and  selected  prior  years  are  summarized  in  the  following 
table: 


Sources 

1920 

1919 

1918 

1914 

Distilled    spirits  
Fermented  liquors... 

$97,905,275.71 
41,965,874  09 
295  809  355  44 

$365,211,252.26 
117,839,602.21 
206  003  091  84 

$317,553,687.33 
126.285,857.65 
156  188  659  90 

$159,098.177.31 
67,081,512.45 
79  986  6'?>9  68 

Oleomargarine  
Capital-stock  tax,  in- 
cluding other  spe- 

3,728,276.05 
102  933  701  35 

2,791,831.08 
33  497  047  82 

2,336,907.00 
27  281  269  12 

1,325,219.13 

Miscellaneous        and 
war  excise   taxes.  . 
Stamp  sales  for  par- 
cel-post    packages, 
etc 

883,863,871.82 
24  437  893  75 

513,823,884.14 
10,1(19,406.51 

225.973,363.44 
4  336  182  21 

1,136,070.65 

Income    and    excess- 
profits   taxes  
Total  receipts  

3,956,936,  003.00 
5,407,580,251.81 

2,600,783,902.70 
3,850,150,078.56 

2,838,999,894.28 
3,698,955,820.93 

71,381,274.74 
380,008,893.96 

Annual  Report  of  the  United  States  Commissioner  of  Internal 
Revenue.    1920.    p.  8. 

I  had  occasion  to  look  over  the  report  of  the  Commissioner 
of  Internal  Revenue,  I  think,  for  1917,  and  when  the  incomes 


122 


SELECTED   ARTICLES 


reached  $4,000,000  or  $5,000,000,  then  there  is  no  change,  there 
is  no  difference,  between  the  surtax  on  $5,000,000  and  that  of 
$6,000,000,  $7,000,000,  $8,000,000,  or  $10,000,000,  or  any  sum  above 
$5,000,000.  Then  I  turned  to  the  page  where  it  was  given  in 
States  the  number  of  people  who  paid  taxes  on  income  of  more 
than  $1,000,000.  I  found  there  was  not  a  man  in  the  State  of 
Michigan  who  paid  taxes  on  incomes  of  more  than  $4,000,000, 
although  we  know  there  are  several  men  in  the  State  of  Michigan 
whose  income  is  figured  above  $4,000,000  a  year.  It  is  evident 
they  are  either  investing  their  money  in  tax-free  securities  or 
adding  to  the  plants  and  failing  to  distribute  the  profits.  That 
would  happen.  I  know  of  one  in  particular,  whose  income  is 
very  great,  who  has  added  many  million  dollars'  worth  of 
additions  to  his  plant,  invested  several  million  dollars,  and,  of 
course,  employing  a  large  number  of  men.  He  must  not  be 
criticized  for  that;  for  that  he  should  be  complimented,  but 
with  an  income  of  $30,000,000  to  $50,000,000  a  year  he  did  not 
pay  taxes  on  an  income  of  more  than  $4,000,000.  It  is  evident  he 
has  been  investing  in  tax-free  securities,  in  my  opinion.  Joseph 
W.  Fordney.  Hearings  before  the  Committee  on  Ways  and 
Means.  1921.  p.  15. 

TABLE  SHOWING  TOTAL  NUMBER  OF  PERSONAL  INCOME-TAX  RETURNS  FILED 
FOR  THE  CALENDAR  YEAR  ENDED  DECEMBER  31,  1918,  DISTRIBUTED 

BY  INCOME  CLASSES 
Income  Classes  Number  of   Returns 


2,000 

3,000 
4,000 
5,000 
6,000 
7,000 
8,000 
9,000 

10,000 

11,000 
12,000 
13,000 
14,000 
15,000 
20,000 
25,000 
30,000 
40,000 
50,000 
60,000 
70,000 
80,000 
90,000 

100,000 

150,000 

'     3*000 

i  406  878 

«     4,000  

«     5,000  

«    6,000  

126,554 

'     7,000  

79,152 

«     8,000  

51  381 

'      0,000... 

35  117 

10,000  

'     1  1,000  

'     12,000  

'     13,000  

'     14,000  

.   10  882 

'     15,000  

'     20,000  

'     25,000  

'     30,000  

'     40,000  

II  887 

'     50,000  

'     60,000  

'     80,000  

90,000  

866 

TAXATION 


123 


Income  Cl 

asses                                              Numbe 

500  ooo  

500  ooo 

750  ooo  

750  OOO 

1,000,000  

I  OOO  OOO 

1,500,000  

i  500,000 

2,000  ooo  

2  000,000    ' 

3,000,000  

3  000,000   ' 

'     4,000,000  

4,000,000    ' 

'     5,000,000  

5,000,000 

and    over    . 

401 
247 
260 

122 
132 

46 

33 
16 
ii 

4 

2 
I 


Total    4,425,114 

Statistics  of  Income.    Compiled  by  United  States  Commissioner 
of  Internal  Revenue.    1921. 


NEGATIVE  DISCUSSION 

SALES  OR  TURNOVER  TAX  > 

It  is  not  advisable  under  present  conditions  to  resort  to  any 
one  of  the  several  forms  of  a  sales  or  turnover  tax  of  general 
application  which  are  being  proposed. 

The  Committee  approached  in  the  most  hopeful  spirit  the 
proposal  that  our  tax  system  could  be  greatly  simplified  and 
perhaps  the  greater  part  of  the  necessary  revenue  could  be 
raised  through  the  adoption  of  some  form  of  a  general  sales 
tax.  It  is  no  exaggeration  to  say  that  most  of  the  members 
of  the  Committee  at  the  outset  were  rather  predisposed  in 
favor  of  a  general  sales  tax,  and  it  was  with  the  greatest  reluc- 
tance that  the  Committee  reached  the  conclusion  that  such  a 
tax  does  not  offer  a  satisfactory  solution  of  the  taxation  problem. 
Forms  of  Sales  Tax  Now  Being  Proposed 

The  several  proposals  for  a  sales  tax  of  general  application 
fall  into  three  groups: 

1.  A  tax  on  every  sale  or  turnover,  not  only  of  commodities 
but  also  of  services,  real  property,  capital  assets,  etc.,  and  on 
rent  and  interest. 

2.  A  tax  on  every  sale  or  turnover  of  goods,  wares  and 
merchandise  (i.e.,  limited  to  commodities). 

3.  A  tax  on  all  final  sales  of  goods,  wares  and  merchandise 
for  consumption  or  use. 

The  first  two  are  of  much  the  same  nature,  differing  only 
in  the  scope  of  their  application,  and  can  well  be  considered 
together,  after  which  the  third  will  be  taken  up.  In  discussing 
this  entire  question  it  is  to  be  borne  in  mind  that  the  comparison 
is  not  with  the  existing  objectionable  excess  profits  tax,  the 
repeal  of  which  the  Committee  joins  in  recommending,  but 
rather  with  an  increase  in  the  corporation  income  tax,  the  docu- 
mentary stamp  taxes,  customs  duties  and  the  sales  taxes  on 
specified  commodities. 

1  Report  of  the  Tax  Committee  of  the  National  Industrial  Conference 
Board  on  the  federal  tax  problem,  p.  12-3!' 


126  SELECTED  ARTICLES 

Reasons  for  Not  Approving  Turnover  Tax 

The  more  important  of  the  reasons  which  have  led  the  Com- 
mittee to  its  conclusion  after  hearing  and  giving  the  most  care- 
ful consideration  to  extended  arguments  on  both  sides  are: 

i.  There  is  great  uncertainty  as  to  the  form  such  a  tax 
would  finally  take,  as  well  as  to  the  rate  necessary  to  raise  the 
required  revenue. 

Various  advocates  of  a  general  turnover  tax  estimate  that  a 
I  per  cent  tax  on  all  turnovers  would  produce  from  $1,500,000,000 
to  $5,000,000,000.  If  the  tax  is  limited  to  I  per  cent  on  the 
turnover  of  goods,  wares  and  merchandise  alone,  the  estimates 
go  down  to  as  low  as  $750,000,000.  One  of  the  best  known 
advocates  of  the  sales  tax  states  that  no  one  can  estimate 
within  $1,000,000,000  what  such  a  tax  would  produce.  Mr. 
Joseph  S.  McCoy,  in  a  letter  to  the  Committee  dated  September 
6,  1920,  estimates  that  from  a  tax  of  I  per  cent  covering  sales 
of  all  kinds  by  traders,  manufacturers,  mines  and  farms, 
$1,100,000,000  should,  with  careful  administration,  be  collected. 
If  to  this  is  added  sales  of  real  estate,  sales  of  the  use  of  real 
estate  (rents),  amusements,  sales  by  hotels,  including  prepared 
food,  lodging  and  service,  advertisements,  securities,  etc.,  he 
estimates  that  this  would  be  increased  to  about  $1,575,000,000. 
It  is  important  to  note,  moreover,  that  he  says  his  estimates 
are  based  upon  every  available  source  of  information,  which  is, 
however,  very  meagre.  The  Committee  does  not  feel  it  advis- 
able to  levy  a  tax  the  revenue  from  which  no  one  can  reasonably 
forecast  and  which  its  very  proponents  admit  might  produce 
$1,000,000,000  more  than  was  anticipated.  This  tax  must  be 
paid  in  the  first  place  by  business,  whether  it  is  eventually  passed 
on  or  not.  It  is  not  believed  that  business  men  desire  to  pay  or 
even  collect  for  the  Government  perhaps  twice  as  much  revenue 
as  may  be  required. 

Experience  in  such  other  countries  as  have  introduced  some 
form  of  general  turnover  tax,  such  as  the  Philippines  and 
Canada,  indicates  that  Congress  would  find  it  necessary  to  yield, 
as  they  have,  to  pressure  and  make  important  exemptions,  such, 
for  instance,  as  the  initial  sale  of  farm  products.  If  this  were 
done  the  yield  of  the  tax  would  be  greatly  reduced,  and  it  is 
not  improbable  that  the  basic  rate  would  be  set  at  2  per  cent  or 
higher,  and  that  still  higher  rates  would  be  applied  to  the  sales 
of  less-essentials  and  luxuries.  The  Canadian  act,  for  example, 


TAXATION  127 

in  addition  to  the  basic  rate,  levies  additional  higher  rates  on 
specific  articles  such  as: 

3%  on  chewing  gum. 
5%  on  pianos. 

10%  on  articles  of  clothing,  carpets,  rugs,  robes  or  sporting  goods  over 
a  fixed  value,  boats,  yachts,  cameras,  confectionery,  fire  arms,  cart- 
ridges, pianos  over  $450,  other  musical  instruments,  lighting  fixtures, 
certain  articles  of  cutlery  and  toilet  articles,  cut  glassware,  clocks 
and  watches,  walking  sticks,  etc. 

15%  on  automobiles  retailing  for  not  more  than  $3000,  oriental  rugs  and 
antiques,  certain  articles  of  furniture  and  chinaware. 

20%  on  automobiles  retailing  for  more  than  $3000,  jewelry  over  $5  in 
value,  certain  toiletware,  liveries,  hunting  garments  and  knives, 
smoking  articles,  certain  patent  medicines,  perfumes,  etc. 

50%  on   certain   articles    of   gold. 

Taxes  at  specific  rates  on  other  articles. 

An  annual  license  tax  for  selling  or  dealing  in  any  of  these  articles. 

It  is  not  improbable  that  if  Congress  should  undertake  to 
frame  a  law  taxing  the  sale  of  every  article,  it  would  be  inclined 
to  impose  higher  rates  on1  less  essential  articles  similar  to  those 
in  the  Canadian  law,  nor  would  Congress  be  likely  to  reduce 
luxury  taxes  while  it  was  imposing  a  tax  on  the  sale  of  neces- 
sities. 

It  has  been  suggested  that  bankers,  brokers  and  commission 
men  should  be  taxed,  not  on  their  sales,  but  on  their  commis- 
sions or  gross  profits ;  and  such  an  exception  might  be  neces- 
sary. If  this  were  done,  it  is  reasonable  to  expect  that  Con- 
gress would  impose  some  other  tax  upon  these  classes  of  busi- 
ness and  that  if  such  a  tax  were  imposed  on  them  it  would  at 
least  be  as  burdensome  as  the  tax  on  other  classes  of  business. 

One  advantage  which  the  sales  tax  possesses  is  that  it  would 
be  comparatively  easy  for  any  business  organization  to  deter- 
mine what  it  would  have  to  pay.  It  is  urged  that  because  the 
amount  of  the  tax  is  easily  determinable  it  could  be  paid 
monthly  or  quarterly  upon  the  sales  of  the  preceding  month 
or  quarter  on  the  pay-as-you-go  principle,  and  the  accumulation 
oi  a  tax  obligation  to  be  paid  in  the  following  year  could  thus 
be  avoided.  If  such  a  tax  law  were  passed,  applying  to  the 
sales  of  1921,  business  men  would  have  these  payments  to 
make  in  addition  to  meeting  the  payments  of  the  excess  profits 
and  income  taxes  levied  upon  the  income  of  the  year  1920, 
which  must  be  paid  during  1921. 

2.     A  turnover  tax  would  be  a  large  tax,  not  a  small  tax. 

It  is  frequently  stated  by  the  advocates  of  the  tax  that  I 
per  cent  on  every  sale  is  such  a  small  amount  that  certain 
admitted  inequities  in  its  operation  are  negligible.  The  tax  is 
advocated,  however,  to  produce  enought  revenue  to  replace  the 


128  SELECTED  ARTICLES 

excess  profits  tax  and  materially  reduce  the  surtaxes  on  personal 
income.  The  figure  most  commonly  named  is  $2,000,000,000. 
As  pointed  out  above,  it  is  probable  that  to  produce  such  a 
revenue  the  basic  rate  would  have  to  be  2  per  cent  or  higher.  It 
must  be  borne  in  mind  that  the  tax  will  be  collected  entirely 
from  business  and  that  this  amount  of  revenue  is  more  than 
double  what  would  be  secured  from  the  excess  profits  tax.  In 
spite,  therefore,  of  the  illustrations  of  individual  cases  based 
upon  a  i  per  cent  rate,  the  tax  as  paid  by  the  average  business  or- 
ganization would  be  a  very  large  amount.  A  tax  of  only  i 
per  cent  of  his  gross  sales  levied  upon  a  merchant  who  turns  his 
stock  four  or  five  times  a  year  would  in  many  cases  equal  or 
exceed  40  per  cent  of  his  net  profits. 

3.  The  uncertainty  as  to  whether  or  not  the  tax  would  in 
fact  be  shifted  to  the  consumer,  and  the  advantage  it  would 
give  to  the  multiple-process  organizations  would  be  most  serious 
in  their  effect  upon  business. 

There  is  some  disagreement  among  the  advocates  of  the  sales 
tax  as  to  the  extent  to  which  it  would  be  shifted.  Some  assert 
that  unless  the  tax  is  shifted  it  has  little  in  its  favor,  and  that 
in  cases  where  there  is  a  reasonable  doubt  whether  it  would  be 
shifted,  it  should  not  be  imposed.  Others  maintain  that  it  will 
be  shifted  or  not,  according  to  competitive  conditions,  because 
such  a  tax  would  be  a  generally  recognized  item  of  cost.  The 
first  element  of  uncertainty  as  to  the  extent  to  which  the  tax 
would  be  shifted  arises  from  the  fact  that  certain  competitors 
would  pay  it  to  a  greater  extent  than  others  engaged  in  the 
same  industry. 

Those  advocates  of  the  sales  tax  who  admit  it  can  not  al- 
ways be  shifted,  assert  that  it  will  be  shifted  when  competition 
permits  and  will  not  be  shifted  when  competition  does  not 
permit,  just  as  would  be  the  case  in  any  other  item  of  cost. 
They  compare  this  tax  to  the  payment  of  rent,  stating  that 
every  business  man  has  to  shift  his  rent  through  the  selling 
price  of  his  goods.  In  considering  this  argument  we  must 
bear  in  mind  the  change  that  has  occurred  in  business  con- 
ditions and  not  to  be  misled  by  the  experience  of  the  last  few 
years,  during  which  it  was  comparatively  easy  for  most  busi- 
nesses to  shift  any  advancing  item  of  cost  with  a  profit  added. 
The  country  has  passed  from  a  sellers'  market  to  a  buyers' 
market.  Items  of  advancing  cost  can  not  be  readily  passed 


TAXATION  129 

on  to  the  consumer.  It  is  conceivable  that  even  an  advance 
in  rent  might  come  out  of  profits  in  special  situations  where 
it  would  be  impossible  to  advance  the  selling  price  sufficiently 
to  cover  it.  A  merchant  with  a  stock  of  goods  on  hand  on 
which  the  prices  were  declining  might  find  it  difficult  to  advance 
his  prices  enough  to  cover  the  tax.  Business  men  generally 
are  confronted  with  the  necessity  of  reducing  their  costs  in 
order  to  be  able  to  sell  their  product  at  prices  which  will 
encourage  purchases  by  consumers.  Such  a  tax  would  stand 
in  the  way  of  this  purpose.  It  seems  undesirable  that  the 
tax  be  shifted  when  competition  permits,  and  not  shifted  when 
competition  does  not  permit.  When  business  is  good  and  the 
demand  is  strong  and,  consequently,  competition  not  keen,  the 
tax  could  be  shifted.  That  is  the  very  time  when  a  business 
is  making  a  profit  and  can  afford  to  pay  a  tax.  When  the 
demand  falls  off  and  competition  grows  so  keen  that  the  tax 
cannot  be  shifted,  how  can  it  be  paid?  Under  such  conditions 
there  may  not  be  any  net  profits  from  which  to  pay  it.  It 
would  be  added  as  an  item  of  cost  to  the  losses  which  might 
bring  insolvency. 

4.  To  the  extent  that  a  sales  tax  is  not  shifted  it  becomes 
a  tax  on  gross  income,  which  is  entirely  inequitable  as  between 
various  classes  of  business. 

The  Committee  believes  that  a  tax  upon  gross  income 
would  be  more  burdensome  than  a  tax  upon  net  income.  The 
inequity  of  a  tax  on  turnover  or  gross  income  as  between  a 
business  which  turns  its  capital  once  in  several  years  and 
another  which  turns  its  capital  several  times  a  year — provided 
the  tax  cannot  be  entirely  shifted — is  too  great  to  be  borne. 

The  statistics  of  taxable  income  for  1917,  the  latest  year 
for  which  a  report  has  been  issued  by  the  Bureau  of  Internal 
Revenue,  indicate  that  in  that  year  the  total  gross  income  of 
manufacturing  corporations  was  $40,437,000,000,  and  the  total 
taxable  net  income  was  $5,736,000,000.  The  total  gross  income 
of  trading  corporations  was  $19,804,000,000,  and  the  total  tax- 
able net  income  was  $1,481,000,000.  Assuming  that  the  gross 
income  did  not  greatly  exceed  the  total  sales,  a  tax  of  only 
i  per  cent  upon  the  gross  would  be  equivalent  to  7  per  cent 
on  the  net  in  the  case  of  manufacturing  corporations,  and  13.4 
per  cent  on  the  net  in  the  case  of  trading  corporations.  It  will 
be  noted  that  these  percentages  are  only  an  average  and  that 


130  SELECTED  ARTICLES 

while  in  some  individual  cases  they  would  be  lower,  in  many 
other  cases  they  would  undoubtedly  be  higher. 

To  illustrate  the  effect  of  the  tax,  manufacturing  corpora- 
tion A,  which  employs  in  its  business  a  capital  of  $1,000,000, 
makes  a  net  profit  of  $100,000,  and  has  an  annual  gross  income 
•of  $500,000,  might  be  compared  with  trading  corporation  B, 
which  employs  the  same  amount  of  capital,  makes  the  same 
net  profit  and  has  an  annual  gross  income  of  $5,000,000.  A 
turns  its  capital  once  in  two  years.  B  turns  it  five  times  in 
one  year.  At  a  rate  of  I  per  cent  A  would  pay  a  tax  of  $5,000, 
which  is  %  of  I  per  cent  of  the  capital  employed,  or  5  per  cent 
of  its  net  income.  B  would  pay  $50,000,  which  is  5  per  cent  of 
the  capital  employed  and  50  per  cent  of  its  net  income.  One  of 
the  two  businesses  with  the  same  investment  and  the  same 
profits  would  pay  a  tax  ten  times  as  large  as  the  other.  This 
illustration  is  not  extreme.  There  are  numerous  businesses 
involving  large  investment  and  many  processes  where  the  capital 
employed  is  not  turned  over  as  frequently  as  in  the  case  of  A. 
On  the  other  hand,  it  is  a  well-known  fact  that  it  is  common 
practice  in  certain  lines  of  business  for  retailers  -to  turn  their 
capital  as  often  as  ten  times  annually. 

The  conclusion  thus  indicated  is  confirmed  by  some  very 
interesting  figures  supplied  by  one  of  the  members  of  the  Com- 
mittee. He  directed  one  his  assistants  to  run  through  his  client 
files  and  to  schedule  the  gross  sales  and  net  income  in  each 
case  .where  the  file  included  a  copy  of  a  recent  income  tax 
return.  In  this  way  he  secured  exact  figures  for  twenty-six 
concerns  located  in  all  parts  of  the  country,  engaged  in  seven- 
teen different  industries,  selected  entirely  by  chance,  and  repre- 
senting, it  is  thought,  the  typical  "run  of  the  mine."  (For 
complete  schedule  see  Appendix  B.) 

These  few  concerns  afforded  three  instances  where  a  tax  of 
only  i  per  cent  of  the  gross  sales  would  have  been  equivalent  to 
between  20  per  cent  and  30  per  cent  of  the  net  income,  and 
sixteen  other  instances  in  the  past  three  or  four  years  where 
such  a  tax  would  have  been  equivalent  to  between  5  per  cent 
and  20  per  cent  of  the  net  income.  These  are  actual  figures 
of  actual  cases.  It  is  startling  to  contemplate  the  disparity 
in  these  cases  if  the  taxpayer  should  happen  also  to  be  unable 
to  shift  the  tax  to  the  consumer. 

The  Committee   is   forced  to  the  conclusion  that  a  tax  on 


TAXATION  131 

net  income  is  a  far  safer  one  for  business  than  a  possible  tax 
on  gross  income,  and  that,  after  the  abnormal  years  we  have 
passed  through,  it  is  unwise  to  risk  embarking  upon  such  a 
dubious  experiment  at  a  time  when  every  effort  should  be 
directed  toward  regaining  normal  and  more  stable  conditions. 

5.  It  would  be  an  unfair  discrimination  to  relieve  corpora- 
tions  of   all   but   the   sales   tax,   while   compelling   partnerships 
and    sole   proprietors   to   pay   normal    income   and    surtaxes   on 
their  business  income. 

Under  existing  tax  laws  corporations  pay  an  excess  profits 
tax  (the  righest  rate  of  which  is  40  per  cent)  and  an  income  tax 
of  10  per  cent  on  the  balance  of  the  net  income,  while  partners 
and  sole  proprietors  pay  on  their  entire  income,  including  their 
business  income,  a  normal  tax  of  8  per  cent  and  surtaxes  the 
highest  rate  of  which  is  65  per  cent.  The  difficulty,  amounting 
to  practical  impossibility,  of  separating  the  business  income 
from  the  personal  income  of  a  partner  or  sole  proprietor,  has 
been  demonstrated  in  the  single  year  to  which  the  Revenue  Act 
of  1917  applied,  under  which  the  partnership  and  individual  were 
subject  to  the  excess  profits  tax.  The  Bureau  of  Internal 
Revenue  is  still  loaded  down  with  many  unsettled  cases  turning 
on  the  question  of  what  is  or  is  not  business  income  in  the  case 
of  an  individual.  If,  however,  the  partner  and  sole  proprietor 
are  not  or  cannot  be  entirely  relieved  of  the  surtaxes  on  business 
income,  then  when  the  excess  profits  tax  is  repealed  some  other 
tax  should  be  levied  on  the  income  of  corporations  to  compen- 
sate for  the  surtaxes  paid  by  other  forms  of  business.  A  sales 
tax  paid  by  both  would  only  add  to  the  burden  on  the  individual, 
and  not  in  any  way  lessen  the  discrimination,  because  other 
forms  of  business  would  pay  it  in  addition  to  the  surtaxes. 

The  Committee  recommends  an  increase  in  the  corporation 
income  tax  as  the  simplest  way  in  which  the  taxation  on  corporate 
income  may  be  roughly  equalized  with  the  taxation  of  other 
business  income,  taking  the  latter  to  be  saved  and  invested 
income  subject  to  the  reduced  surtaxes  recommended  by  the 
Committee. 

6.  A  sales  tax  would  tend  to  bring  about  undesirable  changes 
in  business  practices. 

The  cases  cited  above,  showing  what  would  occur  in  the 
cotton  industry,  the  shoe  industry  and  the  tool  industry,  illustrate 
the  effect  of  a  sales  tax  on  small  manufacturers  and  many  classes 


132  SELECTED   ARTICLES 

of  middlemen.  It  is  to  be  questioned  whether  the  Government 
should  levy  a  tax  which  would  be  in  effect  a  bounty  on  combin- 
ations and  which  would  drive  out  of  business  many  classes  of 
so-called  middle  men  who  perform  a  service  which  is  well  worth 
what  it  costs.  Devices  to  get  around  the  tax  through  the 
avoidance  of  technical  sales  would  be  multiplied.  Consignments 
of  goods  to  selling  agents  instead  of  to  wholesale  distributors, 
contracts  for  future  sales,  leases  and  rentals  would  take  the 
place  of  the  economic  process  of  a  direct  sale  at  each  step  of 
distribution.  It  is  not  thought  that  either  manufacturers  or 
distributors  would  welcome  a  situation  in  which,  in  order  to 
avoid  a  tax  on  a  technical  sale,  the  manufacturer  might  be 
induced  to  consign  his  goods  to  wholesale  dealers  as  his  agent 
or,  where  his  capital  was  not  sufficient  to  do  this,  be  required 
to  meet  the  competition  by  paying  not  only  the  tax  upon  his 
own  sale,  but  the  tax  upon  the  sale  by  the  wholesaler.  It  is 
asserted  that  the  cost  of  distribution  would  be  reduced  by  the 
elimination  of  certain  middlemen  through  the  imposition  of 
this  tax.  Even  if  this  should  be  the  case,  is  it  just  or  proper 
or  economically  sound  for  such  a  result  to  be  brought  about 
by  a  temporary  tax  rather  than  by  the  natural  development  of 
a  more  efficient  method  of  distribution?  These  results  would 
occur  regardless  of  whether  or  not  the  tax  were  shifted,  because 
the  business  which  avoided  one  of  the  taxable  steps  would 
secure  that  much  additional  profit  if  the  market  was  based 
upon  the  costs  of  competitors  who  paid  the  tax  and  passed  it 
on. 

Assistant  Secretary  of  the  Treasury  Leffingwell,  in  recently 
commenting  on  the  difficulty  of  estimating  the  yield  of  the 
turnover  tax,  well  said  that  such  a  tax  would  .in  five  years 
revolutionize  present  methods  of  doing  business,  because  means 
of  getting  around  the  intermediate  turnover  tax  would  be 
devised  and  put  into  effect.  Can  business  men  look  with 
equanimity  upon  a  temporary  tax  which  may  change  business 
practices  that  have  proved  their  economic  soundness  by  sur- 
viving the  stress  of  competition? 

7.  The  administrative  difficulties  presented  by  a  turnover 
tax  are  much  greater  than  is  generally  realized. 

It  is  true  that  the  problems  of  reports  and  collection  would 
be  simple  except  for  their  multiplicity.  Even  with  the  exemp- 
tion of  street  peddlers,  boot-blacks  and  other  small  businesses, 


TAXATION  133 

through  establishing  a  minimum  exemption  of  $500  per  month, 
there  would  be  millions  of  returns  that  would  require  a  large 
force  of  field  and  office  auditors  to  check  up.  New  and  com- 
plicated problems  would  arise  in  the  definition  of  what  is  a  sale. 
Leases,  contracts  for  sale,  commission  and  agency  arrangements 
would  be  stimulated.  The  present  practice  in  some  lines,  of 
renting  or  leasing  out  the  product  instead  of  selling  it,  such 
as  now  holds  in  the  case  of  shoe  machinery,  adding  machines, 
coffee  urns,  etc.,  is  capable  of  being  largely  expanded.  Such 
practices  with  the  purpose  of  avoiding  the  payment  of  the  tax 
would  present  considerable  administrative  difficulty.  The  admin- 
istration of  such  a  tax  would  raise  serious  problems,  and  the 
number  of  taxpayers  would  be  so  greatly  increased  that  it 
would  probably  be  difficult  to  prevent  wholesale  evasions. 

The  Bureau  of  Internal  Revenue  has  experienced  the  great- 
est difficulty  in  building  up  and  maintaining  a  sufficient  force 
of  field  agents  and  auditors  to  close  the  income  and  excess 
profits  returns  of  the  last  few  years.  If  these  returns  are  to 
be  disposed  of  within  anything  like  a  reasonable  time,  the  per- 
sonnel of  the  Income  Tax  Unit  cannot  safely  be  depleted  in 
order  to  build  up  the  new  organization  required  for  this  new 
kind  of  tax.  It  is  essential  to  the  success  of  such  a  tax  that 
it  be  properly  administered  from  the  very  outset,  but  the  diffi- 
culties in  the  way  of  securing  a  sufficient  and  qualified  per- 
sonnel are  so  great  as  to  constitute  in  themselves  a  very  strong 
argument  against  its  enactment. 

8.  The  experience  of  other  countries  with  a  general  sales 
tax,  and  the  history  of  the  movement  for  such  a  tax  in  this 
country  after  the  Civil  War,  point  inevitably  to  the  conclusion 
that  such  a  tax  is  a  last  resort,  to  be  availed  of  only  after  other 
resources  have  failed. 

The  discussion  now  going  on  relating  to  a  general  sales  tax 
is  closely  paralleled  by  the  discussion  of  the  same  object  after 
the  close  of  the  Civil  War.  At  that  time  such  a  tax  at  first 
found  widespread  favor,  but  the  proposal  was  finally  aban- 
doned after  a  careful  study  of  the  subject  by  the  United 
States  Revenue  Commission,  whose  report  to  the  Secretary  of 
the  Treasury  was  submitted  by  him  to  Congress  January  29, 
1866.  The  Committee  is  also  advised  that  both  Great  Britain 
and  Italy  have  given  most  serious  consideration  to  the  proposal 
of  a  general  sales  tax,  and  that  in  both  countries  the  conclu- 


134  SELECTED  ARTICLES 

sion  has  been  reached  that  such  a  tax  is  an  absolutely  last  re- 
sort, to  be  availed  of  only  in  case  all  other  sources  of  revenue 
prove  inadequate.  This  despite  the  fact  that  the  rates  of 
the  British  normal  income  tax  and  of  the  business  profits  tax 
are  higher  than  our  own. 

A  general  sales  tax  is  not  new,  as  is  generally  supposed.  It 
has  been  tried  by  many  countries  in  the  past,  but  every  leading 
nation  which  adopted  it  has  abandoned  it  and  never  resumed  its 
use,  except  in  the  present  case  of  France  and  Germany,  which 
have  resorted  to  it  as  a  last  extremity  after  exhausting  every 
other  means  of  raising  revenue.  The  most  recent  reports  con- 
cerning the  French  "taxe  sur  le  chiffre  d'affaires"  are  distinctly 
unfavorable.  This  tax  went  into  'effect  only  very  recently  and 
is  relied  upon  to  yield  only  about  one-fourth  of  the  total  amount 
which  is  being  raised  from  internal  taxation.  The  difference 
in  the  financial  condition  of  France,  and  in  the  form  and  the 
expected  yield  of  the  tax  itself,  and  the  French  experience 
during  the  short  time  it  has  been  in  operation,  are  not  factors 
encouraging  to  the  adoption  of  a  general  sales  tax  in  the  United 
States. 

The  Committee  has  not,  however,  overlooked  the  fact  that 
modified  forms  of  sales  taxes  are  actually  in  effect  in  the 
Philippines  and  Canada,  and  in  particular  that  favorable  reports 
are  reaching  this  country  relative  to  the  operation  of  the  new 
Canadian  taxes. 

Conditions  in  a  country  like  the  Philippines,  where,  aside 
from  agriculture,  productive  industry  plays  such  a  small  part, 
are  so  different  from  those  in  the  United  States  that  a  comparison 
possesses  little  value.  It  is  interesting  to  note,  however,  that  the 
Philippine  tax  is  called  a  "Percentage  Tax  on  Merchants'  Sales," 
and  that  exemptions  from  the  tax  include: 

1.  Merchandise  actually  exported  by  the  vendor; 

2.  Things,  other  than  opium,  subject  to  specific  tax; 

3.  Agricultural  products  when  sold  by  the  producer  or  owner 
of  the  land  where   grown,   whether   in   their   original   state  or 
not. 

It  would  appear  that  a  very  large  part  of  this  tax  revenue  is 
probably  derived  from  sales  of  imports. 

The  Canadian  tax  is  in  form  a  tax  upon  sales  of  finished 
articles  by  manufacturers,  wholesalers  and  jobbers.  It  is  so 
coupled,  however,  with  other  taxes  upon  the  sales  of  a  great 
variety  of  specified  commodities  at  rates  of  3,  5,  10,  15,  20  and 


TAXATION  135 

50  per  cent,  in  addition  to  a  license  tax  on  sales,  and  with  such 
a  long  list  of  exemptions,  that  it  has  little  resemblance  to  the 
proposal  in  this  country  for  a  general  turnover  tax. 

Exemptions  from  the  Canadian  sales  tax  include :  Animals, 
living;  poultry,  fresh  or  salted;  pickled,  smoked  or  canned 
meats ;  canned  poultry ;  soups  of  all  kinds ;  milk,  cream,  butter, 
cheese,  buttermilk,  condensed  milk,  condensed  coffee  with  milk, 
milk  foods,  milk  powder  and  similar  products  of  milk ;  oleo- 
margarine, margarine,  butterine  or  any  other  substitutes  for 
butter;  lard,  lard  compound  and  similar  substances;  cottolene; 
eggs;  chicory,  raw  or  green,  kiln-dried,  roasted  or  ground; 
coffee,  green,  roasted  or  ground;  tea;  hops;  rice,  cleaned  or 
uncleaned ;  rice  flour ;  sago  flour ;  tapioca  flour ;  rice  meal ;  corn 
starch ;  potato  flour ;  vegetables,  fruits,  grains  and  seeds  in  their 
natural  state ;  buckwheat,  meal  or  flour ;  pot,  pearl,  rolled,  roasted 
or  ground  barley ;  corn  meal ;  corn  flour ;  oatmeal  or  rolled  oats ; 
rye  flour ;  wheat  flour  or  wheat  meal ;  sago  and  tapioca ;  macaroni 
and  vermicelli;  split  peas  and  pea  meal;  cattle  foods;  hay  and 
straw;  nursery  stock;  vegetables,  canned,  dried  or  desiccated; 
fruits,  canned,  dried,  desiccated  or  evaporated ;  honey ;  fish  or 
products  thereof;  sugar;  molasses;  maple,  corn  and  sugar-cane 
syrups  and  all  imitations  thereof ;  ice ;  newspapers  and  quarterly, 
monthly  and  semimonthly  magazines  and  weekly  literary  papers 
unbound;  gold  and  silver  ingots,  blocks,  bars,  drops,  sheets  or 
plates  unmanufactured;  gold  and  silver  sweepings;  British  and 
Canadian  coin  and  foreign  gold  coin;  materials  for  use  only 
in  the  construction  of  ships ;  anthracite  and  bituminous  coal 
and  coal  dust,  lignite,  briquettes  made  from  anthracite  or  bitumi- 
nous coal  or  lignite,  coke,  charcoal,  peat,  wood  for  fuel  pur- 
poses; electricity;  calcium  carbide;  gas  manufactured  from  coal, 
calcium  carbide  or  oil  for  illuminating  or  heating  purposes ;  fibre 
for  use  only  in  manufacture  of  binder  twine;  ships  licensed  to 
engage  in  the  Canadian  coasting  trade ;  artificial  limbs  and  parts 
thereof ;  donations  of  clothing  and  books  for  charitable  purposes ; 
settlers'  effects;  articles  enumerated  in  Schedule  C  of  the  West 
India  Agreement  or  articles  purchased  for  use  of  the  Dominion 
Government  or  any  of  the  departments  thereof  or  by  or  for  the 
Senate  or  House  of  Commons ;  "and  the  Governor  in  Council 
shall  have  power  to  add  to  the  foregoing  list  of  articles  exempted 
from  the  tax  on  sales  such  other  articles  as  he  may  deem  it 
expedient  or  necessary  to  exempt  from  the  said  tax." 

If  Canada  has  found  necessary  such  numerous  exemptions 


136  SELECTED   ARTICLES 

and  additions,  those  familiar  with  the  course  of  legislation 
of  general  application  will  fully  appreciate  the  many  difficulties 
which  would  confront  Congress  in  the  consideration  of  a  general 
sales  tax. 

It  appears  that  sober  second  thought  in  foreign  countries 
and  in  this  country  after  the  Civil  War  has  led  to  the  abandon- 
ment of  such  proposals  whenever  possible,  and  already  many  of 
those  who,  at  the  beginning  of  the  present  agitation  in  favor 
of  a  general  sales  tax,  were  prominent  advocates  of  such  a  tax 
have,  after  study  of  the  question,  become  convinced  that  its 
adoption  would  be  unwise. 

9.  It  would  be  economically  unsound  as  well  as  socially 
unjust  to  shift  $2,000,000,000  of  taxation  from  business  and 
personal  income  taxes  to  consumption  taxes. 

A  sales  or  turnover  tax  of  general  application  has  been 
described  by  one  of  its  former  proponents  as  a  "most  unblushing 
consumption  tax."  Those  who  claim  that  a  sales  tax  would  be 
shifted  to  the  ultimate  consumer  propose  that  business  and 
personal  income  shall  be  relieved  of  the  payment  of  $2,000,000,000 
of  taxes  and  this  entire  amount  shifted  to  the  consumer.  One 
of  the  accepted  principles  of  sound  as  well  as  just  taxation  is 
that  it  should  bear  some  relation  to  the  ability  to  pay.  A  tax 
at  a  uniform  rate  upon  all  purchases,  while  falling  more  heavily 
upon  the  largest  spenders,  would  not  bear  any  reasonable  rela- 
tion to  ability  to  pay.  The  great  majority  of  our  population 
must  spend  their  entire  incomes  for  the  absolute  necessities 
required  to  maintain  a  decent  standard  of  living.  Such  a  heavy 
tax  on  those  possessing  small  incomes  would  be  economically 
unsound  because  it  would  have  the  inevitable  tendency  to  reduce 
the  standard  of  living  by  raising  the  cost  of  living,  and  would 
consequently  bring  about  a  necessary  curtailment  of  purchases, 
or  else  would  have  to  be  met  by  increases  in  their  wages  or 
other  sources  of  income. 

It  has  been  asserted  by  the  proponents  of  the  tax  that  the 
cost  of  living  to  the  great  mass  of  consumers  would  be  actually 
reduced,  because  the  tax  would  be  small  on  each  individual 
article  and  would  be  passed  on  in  its  exact  amount,  instead  of 
being  loaded  as  it  is  said  the  excess  profits  tax  is  loaded. 

These  assertions  will  not  bear  investigation.  Regardless  of 
what  the  tax  would  amount  to  on  each  individual  article,  it  is 
proposed  that  it  should  produce  as  a  total  $2,000,000,000,  to  be 


TAXATION  137 

paid  by  consumers  rather  than  to  be  taken  from  the  profits  of 
business  and  personal  income.  It  can  be  readily  admitted  that 
a  low-rate  tax  at  a  fixed  amount  such  as  is  proposed  might  not, 
when  passed  on,  be  loaded  to  as  great  an  extent  as  the  uncertain 
excess  profits  tax,  but  the  mere  fact  that  it  is  for  a  definite 
fixed  amount  is  hardly  sufficient  basis  for  the  conclusion  that  it 
would  not  be  loaded  (when  it  could  be  passed  on)  to  as  great 
an  extent  as  the  taxes  proposed  by  the  Committee.  The  very 
facts  that  the  tax  would  be  levied  upon  all  sales,  including 
initial  sales  of  raw  materials,  and  that  its  advocates  estimate 
there  would  be  an  average  turnover  of  about  six  times  before 
the  final  sale  to  the  consumer,  would  make  it  reasonable  to 
expect  some  loading  as  the  tax  progressed.  It  is  customary 
business  practice  to  add  a  percentage  to  the  cost  of  purchases 
in  determining  selling  prices.  If  the  cost  of  purchases  is 
increased  by  taxes  paid  on  prior  sales,  business  organizations 
would  probably  find  it  necessary  to  load  the  tax  to  cover  the 
cost  of  the  extra  investment,  greater  insurable  value  of  the 
merchandise,  etc.,  in  cases  where  competition  permitted  them 
to  do  so. 

A  second  assertion  that  will  not  bear  investigation  is  that 
the  cumulative  effect  of  a  sales  tax  of  i  per  cent  at  each  turn- 
over would  not  be  more  than  2^  per  cent  added  to  the  cost  of 
the  finished  article.  Some  statements  place  this  percentage  as 
high  as  3*4  per  cent.  The  only  basis  for  this  assertion  which 
the  Committee  has  been  able  to  discover  is  the  citation  of  the 
cumulative  effect  of  such  a  tax  on  the  sale  of  certain  articles. 
.  All  of  these  illustrations  appear  to  deal  only  with  the  added 
cost  of  the  principal  raw  material,  and  ignore  entirely  the 
effect  of  the  tax  on  the  other  factors  entering  into  the  cost 
of  producing  or  distributing  the  article.  As  an  illustration, 
one  widely-referred-to  example  is  the  application  of  this  tax 
on  the  price  of  bread,  which  states  "this  total  tax,  if  passed 
along,  is  so  small,  amounting  to  less  than  one-sixth  of  a  cent  a 
loaf,  that  it  could  not  be  added  to  the  price  per  loaf  to  the 
consumer.  It  would  probably  be  passed  on  by  the  miller  and 
be  paid  by  the  baker,  but  would  be  such  an  infinitesimal  reduction 
from  his  profits  that  he  would  be  almost  totally  unaffected." 
The  tax  to  be  paid  is  arrived  at  by  adding  together  the  tax 
on  the  wheat  when  it  leaves  the  farm,  the  tax  when  it  leaves 
the  miller  and  the  tax  on  the  bread  when  it  leaves  the  baker. 


138  SELECTED   ARTICLES 

Leaving  out  of  consideration  any  effect  the  tax  might  have  on 
the  cost  of  producing  the  wheat  on  the  farm,  or  the  cost  of 
milling  it,  it  is  easy  to  recognize  that  a  calculation  is  entirely 
inaccurate  which  ignores  the  entire  effect  of  the  tax  on  every 
item  in  the  cost  of  baking  except  the  wheat.  The  baker's  cost 
would  be  increased  by  the  tax  on  the  coal  for  his  ovens,  the 
tax  on  the  bricks  used  for  rebuilding  his  ovens  and  the  tax 
on  every  single  item  purchased  for  the  conduct  of  his  business. 
Illustrations  given  of  the  effect  of  the  tax  on  various  articles 
of  clothing  make  the  same  error  of  ignoring  the  effect  of  the 
tax  on  any  item  of  cost  except  of  the  principal  raw  material. 
Statements  based  on  such  reasoning  are  manifestly  unreliable. 
To  whatever  extent  a  sales  tax  could  be  passed  on  more  readily 
than  taxes  on  profits  or  income,  it  would  increase  the  cost  of 
living  to  those  who  do  not  pay  these  taxes. 

The  proposal  for  a  general  turnover  tax  is  coupled  with 
a  proposal  to  raise  the  exemptions  from  the  income  taxes.  This 
would  afford  relief  to  a  considerable  deserving  class.  It  would 
not,  however,  in  any  way  benefit  the  great  mass  of  people  with 
incomes  less  than  the  present  exemptions,  who  form  the  great 
majority  and  the  extent  of  whose  purchasing  power  regulates 
the  demand  for  most  commodities.  It  is  not  believed  that  when 
business  men  fully  realize  the  effect  of  such  a  tax  they  will 
care  to  go  before  the  rest  of  the  country  with  any  such  proposal. 
Certainly  they  could  not  ask  Congress  to  shift  the  burden  of 
the  taxes  which  they  are  now  paying  to  the  shoulders  of  con- 
sumers generally,  without  regard  to  their  ability  to  pay.  The 
Committee  is  convinced  that  business  as  business  is  willing  to 
bear  its  full  share  of  the  tax  burden,  although  not  the  excessive 
and  unjust  share  which  it  is  now  bearing.  The  Committee 
recommends  that,  to  the  extent  that  it  is  necessary  to  replace  the 
revenue  which  would  be  lost  by  the  reduction  of  corporation 
and  personal  income  taxes,  about  40  per  cent  should  be  replaced 
through  an  increase  in  customs  duties,  supplemented  by  addi- 
tional sales  taxes,  but  it  cannot  sanction  the  shifting  of  from 
$1,000,000,000  to  $2,000,000,000  to  consumption  taxes  of  this  sort.  l 

1  The  following  extract  from  the  Report  of  the  Secretary  of  the  Treas- 
ury, which  has  just  been  made  public  since  the  final  meeting  of  the  Com- 
mittee, confirms  the  conclusions  already  reached  by  the  Committee: 
"Further  consideration  of  the  subject  has  convinced  me  that  a  general 
sales  or  turnover  tax  is  altogether  inexpedient.  It  would  apply  not  only 
to  the  absolute  necessities  of  life — the  food  and  clothing  of  the  very 
poor — but  it  would  similarly  raise  the  prices  of  the  materials  and  equip- 
ment used  in  agriculture  and  manufactures.  It  would  confer,  in  effect,  a 


TAXATION  139 

10.  While  the  Committee  has  not  allowed  political  ex- 
pediency to  influence  it  in  reaching  its  conclusions,  the  political 
opposition  to  the  sales  tax  must  be  given  serious  consideration. 

The  Committee  has  been  reliably  informed  that  even  though 
initial  sales  of  farm  products  were  exempted,  there  would 
be  determined  opposition  on  the  part  of  agricultural  interests 
and  perhaps  also  on  the  part  of  labor  interests  to  any  form  of 
general  sales  tax.  The  Committee  would  be  hopeful  that  attacks 
upon  sound  registration  could  be  overcome  by  education  and 
discussion,  but  it  feels  that  the  sales  tax  is  too  vulnerable  to 
justify  attack  and  that  its  details,  especially  the  question  of 
exemptions,  would  present  too  great  difficulties  for  such  a  hope 
in  this  instance  to  be  realized.  In  view  of  the  pressing  need 
for  immediate  remedial  legislation,  it  is  desirable  that  those  who 
have  been  advocating  the  sales  tax  should  give  this  matter  most 
careful  reconsideration  in  order  that  they  may  unite  in  sup- 
porting a  program  of  a  kind  which  the  Committee  is  convinced 
holds  more  promise  of  practical  realization. 

The  advocates  of  the  sales  tax  claim  for  it  all  the  advan- 
tages arising  from  the  repeal  of  the  excess  profits  tax  and 
the  reduction  of  surtaxes  on  personal  income.  The  repeal  of 
the  excess  profits  tax  and  a  reduction  of  the  surtaxes  are  recom- 
mended by  the  Committee.  Such  claims,  therefore,  have  nothing 
to  do  with  the  question  at  issue,  which  is  whether  the  methods 
of  raising  revenue  recommended  by  the  Committee  are  fairer, 
safer  and  less  objectionable  than  a  general  turnover  tax  would 
be. 

Compare  the  uncertainty  as  to  yield  and  effect,  the  inequity 
as  between  different  forms  of  business  and  the  added  burden 
to  the  poorer  classes  of  our  population,  all  inherent  in  the  pro- 
substantial  bounty  upon  large  corporate  combinations  and  place  at  cor- 
responding disadvantage  the  smaller  or  dissociated  industries  which 
carry  on  separately  the  business  operations  that  in  many  combinations 
and  trusts  are  united  under  one  ownership.  The  group  of  independent 
producers  would  pay  several  taxes,  the  combination  only  one  tax.  Finally, 
it  would  add  a  heavy  administrative  load  to  the  Bureau  of  Internal 
Revenue  which — burdened  as  it  is  with  thp  responsibility  of  enforcing  the 
child-labor  tax  law,  the  national  prohibition  act,  the  narcotic-drug  law, 
the  adulterated  butter  and  mixed  flour  tax  laws — is  already  near  the  limit 
of  its  capacity.  Simplification  of  the  tax  law  and  restriction  rather  than 
extension  of  its  scope  are  as  important  from  the  standpoint  of  successful 
administration  as  from  that  of  the  taxpayers'  interests.  Consumption 
taxes,  if  used  at  all,  should  be  laid  upon  other  than  absolute  necessaries 
and  restricted  to  a  few  articles  of  widespread  use,  so  that  the  administra- 
tion of  the  tax  may  be  concentrated  and  made  relatively  simple." — Annual 
Report  of  the  Secretary  of  the  Treasury  for  the  fiscal  year  ending  June 
30,  1920,  p.  28. 


I4o  SELECTED   ARTICLES 

posal  for  a  general  turnover  tax,  with  the  recommendations  of 
the  Committee  to  raise  the  revenue  by  increase  in  the  established 
corporation  income  tax,  the  documentary  stamp  tax,  customs 
duties,  and,  if  necessary,  an  excise  tax  levied  at  some  one  point 
on  the  sale  of  a  specified  list  of  commodities,  which  while  not 
absolute  necessities,  yet  are  in  such  strong,  constant  demand, 
that  the  tax  would  not  so  seriously  affect  the  sale,  as  in  the 
case  of  many  commodities  which  would  be  included  in  a  general 
sales  tax. 

These  are  all  taxes  in  the  collection  of  which  the  Bureau  of 
Internal  Revenue  has  an  experienced  organization.  No  new 
form  of  tax  is  suggested,  and,  at  the  most,  only  a  very  few 
new  objects  of  taxation.  The  increased  revenue  would  be  de- 
rived almost  entirely  from  increasing  taxes  already  in  force, 
the  effect  of  which  increases  can  be  forecast  with  considerable 
accuracy.  A  sales  tax  is  a  departure,  the  results  of  which  or 
the  revenue  to  be  derived  from  which  none  can  foresee.  It  is 
safer  to  increase  the  taxes  which  produce  the  least  harmful 
effects  than  to  venture  into  new  and  dubious  fields  of  taxation 
at  this  critical  period.  It  would  be  better  for  business  men  to 
unite  on  a  praticable,  conservative  program  for  changes  in  our 
revenue  laws  which  have  a  fair  chance  of  accomplishment  than 
to  seek  for  a  panacea  which  is  uncertain,  unjust  and  unattain- 
able. 

Tax  on  Retail  Sales 

The  objections  to  a  sales  tax  at  each  turnover  cannot  be 
met  by  substituting  a  general  tax  on  the  sale  of  goods,  wares 
and  merchandise  at  some  one  point,  such,  for  instance,  as  upon 
a  final  or  retail  sale  for  consumption  and  use. 

The  contentions  of  organizations  of  retailers  that  such  a 
tax  in  many  cases  could  not  be  shifted,  and  that  it  would 
necessarily  have  to  be  so  large  (estimates  being  not  less  than 
3  per  cent)  that  it  would  put  many  of  them  out  of  business,  are 
well  founded.  It  is  customary  for  retailers  in  many  industries 
to  turn  their  stocks  from  five  to  ten  times  a  year.  The  cumula- 
tive effect  of  such  a  tax  would  exhaust  the  net  income  in  any 
case  in  which  it  could  not  be  shifted,  and  there  are  many  items 
on  which  a  tax  of  3  per  cent  could  not  be  added  to  the  price. 
To  meet  this  objection  the  proponents  of  the  tax  assert  that 
the  retailer  can  equalize  such  cases  by  adding  3  per  cent  to  his 
cost  of  doing  business  and  distributing  the  tax  over  the  articles 
which  will  bear  it,  just  as  he  distributes  any  other  item  of  cost. 


TAXATION  141 

The  retailers  on  the  other  hand  maintain  that  this  cannot  be 
done  and  that  if  a  sales  tax  is  to  be  levied  it  should  be  levied 
on  manufacturers  and  wholesalers  as  well  as  upon  them. 

A  greater  difficulty,  however,  is  the  determination  of  when 
a  sale  is  a  sale  for  consumption  or  for  use.  Sugar  sold  to  a 
householder  is  probably  for  final  consumption,  but  sugar  sold 
to  a  candy  manufacturer  is  part  of  his  raw  material.  An 
automobile  tire  sold  to  an  owner  is  for  final  use,  but  it  could 
not  properly  be  so  considered  when  sold  to  an  automobile 
manufacturer,  in  which  case  its  full  cost  would  again  be  taxed 
upon  the  sale  of  the  completed  car.  Coal  sold  to  a  householder 
is  probably  for  final  consumption,  but  where  would  the  line  be 
drawn  in  case  it  is  sold: 

1.  To   a  gas  company   for  making   gas? 

2.  To  a  steel  company  for  making  its  own  gas  fuel? 

3.  To  a  power  plant  for  generating  power  for  sale? 

4.  To  an  electric  railway? 

5.  To  a  manufacturer  for  making  his  own  power? 

If  these  are  considered  cases  of  final  consumption  or  use, 
this  tax  becomes  practically  a  turnover  tax  with  all  the  added 
objections  and  inequities  which  would  very  possibly  arise  from 
its  more  or  less  hit-or-miss  application  to  many  but  not  to  all 
turnovers.  If  they  are  not  so  considered,  then  an  elaborate 
system  must  be  devised  to  establish  the  use  to  which  the  coal 
is  put  in  order  to  secure  exemption  from  the  tax.  The  num- 
ber of  commodities  with  respect  to  which  a  similar  situation 
would  arise  is  inexhaustible,  and  their  very  multiplicity  pre- 
sents a  difficulty  which  is  practically  decisive.  Although  such 
a  tax  levied  on  all  sales  would  be  impractical,  there  are  many 
commodities  on  which  a  sales  tax  could  be  levied  at  some  one 
point  in  their  course  from  the  raw  material  to  the  consumer. 
The  Committee  recommends  the  imposition  of  additional  cus- 
toms duties  and  sales  taxes  on  commodities  which,  while  not 
absolute  necessities,  are  of  such  widespread  and  general  use, 
so  well-established  in  their  distribution,  and  the  demand  for 
which  is  so  constant,  that  none  of  these  qualities  would  be  ad- 
versely affected  by  the  imposition  of  the  tax.  The  Committee 
feels  it  is  better  to  select  such  commodities  intelligently  than  to 
levy  a  general  tax  without  knowledge  or  investigation  of  the 
effect  or  the  practicability  of  collecting  such  a  tax. 


142  SELECTED   ARTICLES 


WHY  NOT  A  SALES  TAX?1 

Ever  since  man  has  been  living  in  communities  with  some 
form  of  government,  taxation  has  been  a  live  subject  of  discus- 
sion. The  World  War  with  its  unprecedented  expenditure  of 
life  and  treasure  brought,  and  has  left  with  us,  so  many  prob- 
lems of  an  apparently  almost  insoluble  character  or  of  such 
stupendous  size  that  it  is  not  surprising  to  find  our  tax  situation 
in  this  country  offering  difficulties  which  seem  almost  impossible 
of  satisfactory  solution.  Heroic  measures  were  resorted  to  dur- 
ing the  war  to  raise  the  enormous  amounts  of  revenue  which 
were  indispensable  to  carry  on  the  tremendous  struggle. 

When  it  is  realized  that  immediately  prior  to  the  armistice 
the  United  States  was  expending  as  much  every  sixty  days  as 
the  North  spent  during  the  whole  four  years  of  the  Civil  War, 
that  in  an  hour's  artillery  fire  in  France  more  ammunition,  by 
far,  would  be  fired  than  was  used  by  both  sides  in  the  entire 
three  days'  battle  at  Gettysburg,  and  that  all  these  things  have  to 
be  paid  for  in  some  way  or  other,  some  slight  conception  is  gained 
of  the  staggering  financial  problems  which  the  war  created.  Never 
before  has  a  war  been,  to  so  large  an  extent,  a  matter  of  organ- 
ization and  of  industry  and  support  at  home.  The  tremendous 
expenditures  which  were  thus  occasioned  could  be  financed 
in  only  three  ways: 

1.  Loans. 

2.  Issue  of  paper  money. 

3.  Levy  of  taxes. 

A  number  of  reasons  would  readily  be  given  why  so  con- 
siderable a  part  of  the  expenditure  was  financed  by  levying 
taxes  of  unexampled  severity  in  both  Great  Britain  and  the 
United  States.  The  excess  profits  tax,  for  which  we  were 
indebted  to  the  ingenuity  and  resourcefulness  of  the  British, 
was  imposed  from  mixed  motives.  While  on  the  one  hand  it 
was  the  backbone  of  war  taxes,  and  in  fact  was  indispensable 
to  the  carrying  on  of  the  war,  it  was  imposed  perhaps  just  as 
much  in  the  first  instance  to  satisfy  British  labor,  which  British 
statesmen  feared  would  not  continue  to  support  the  war  if 
capital  appeared  to  be  unduly  profiting  thereby.  With  all  the 
defects  of  the  war  and  excess  profits  taxes,  and  those  who 

1  By  Walter  A.  Staub.    Administration.     1:491-503.    April,  1921. 


TAXATION  143 

advocated  them  appear  to  concede  the  presence  of  many  defects 
about  as  readily  as  those  who  may  have  unwillingly  accepted  the 
taxes,  it  was  fortunate  for  the  Anglo-Saxon  nations  that  so 
considerable  a  part  of  our  war  expenditure  was  defrayed  from 
taxes  instead  of  through  still  more  loans  or  by  a  resort  to  an 
inflated  currency. 

The  relatively  strong  financial  position  of  the  United  States 
and  Great  Britain  today  is  due  in  no  small  measure  to  the 
courageous  manner  in  which  so  considerable  a  portion  of  the 
current  income  of  the  people  in  each  country  was  applied  to  the 
payment  of  war  expenditures  instead  of  deferring  the  evil  day 
of  settlement  as  long  as  possible  through  still  greater  loans  and 
the  unlimited  issue  of  paper  currency.  The  financial  position 
of  Germany  today  would  be  much  stronger,  if,  instead  of  rely- 
ing on  the  indemnity  she  expected  to  collect  from  the  defeated 
Allies  and  levying  taxes  to  only  a  moderate  extent,  she  had 
laid  taxes  on  war  profits  in  the  same  measure  that  was  done 
in  Great  Britain  and  America.  France,  too,  failed  to  levy  taxes 
to  the  same  courageous  extent  that  Britain  did,  though  an 
extenuating  circumstance,  not  to  be  overlooked,  is  that  the 
defaulting  by  Russia  of  the  interest  on  her  bonds,  which  were 
so  largely  held  in  France,  made  tremendous  inroads  on  the 
income  of  France  and  greatly  impaired  the  tax-paying  ability 
of  her  citizens. 

Sad  to  say,  many  of  the  burdens  imposed  by  the  war  will  be 
with  us  for  years  and  years  to  come.  The  signing  of  the 
armistice  did  not  bring  to  an  end  the  need  for  further  large 
expenditures  of  money  by  the  various  governments.  In  our  own 
country  the  war  debt  created  in  less  than  two  years'  time  now 
calls  for  an  annual  expenditure  of  interest  (without  allowing  for 
any  offset  of  interest  to  be  collected  from  loans  to  our  allies, 
the  payment  of  which  cannot  safely  be  relied  upon  for  at  least 
some  time  to  come)  equalling  what  before  the  war  was  considered 
a  huge  national  budget,  that  is,  approximately  $1,000,000,000.  The 
$1,000,000,000  pre-war  budget  included  not  only  the  expenditures 
of  non-revenue  producing  departments  of  the  national  govern- 
ment, but  also  for  the  post-office  and  for  much  "pork"  for  all 
kinds  of  river  and  harbor  improvements,  post-office  buildings, 
and  similar  public  works  which  congressmen  love  to  secure  for 
their  home  districts.  Not  only  do  we  have  the  additional  annual 
burden  of  war  loan  interest  on  top  of  the  pre-war  government 


144  SELECTED   ARTICLES 

expenditures,  but  the  current  expenditures  of  the  government 
for  non-war  purposes  have  not  yet  been  reduced  to  a  pre-war 
basis.  Also,  the  "mopping  up"  expenditures  following  the  war, 
i.e.,  settlement  for  canceled  contracts  and  war  claims  of  all 
kinds,  shipping  board  losses,  etc.,  will  probably  continue  in 
considerable  amounts  for  some  time  to  come. 

The  large  national  expenditures,  including  a  floating  debt 
which  is  hanging  over  our  heads  and  which  there  seems  to  be 
a  fear  of  attempting  to  fund,  call  for  national  revenues  for 
the  next  several  years,  so  the  Secretary  of  the  Treasury  cal- 
culates for  us,  of  approximately  $4,000,000,000  per  annum.  This 
is  about  four  times  the  largest  pre-war  budget,  which  as  already 
stated  had  included  such  expenditures  as  those  for  the  post- 
office  which  brought  in  a  considerable  revenue.  The  $3,000,000,000 
more  which  we  shall  need  to  pay  out  for  each  of  the 
next  few  years,  in  addition  to  the  pre-war  budget,  will  bring 
in  but  little  income  to  offset  expenditures.  The  only  offset 
will  be  the  reduction  in  interest  charges  due  to  paying  off  the 
floating  debt  and  such  part  of  the  Victory  notes  as  may  be 
redeemed  and  not  funded  at  maturity  in  1923. 

When  one  looks  at  this  tremendous  amount  to  be  raised 
and  thinks  of  the  heavy  taxes  that,  no  matter  what  their  form, 
must  be  laid,  one  yearns  for  those  days  when  the  corporation 
income  tax  was  I  per  cent  (we  smile  now  when  we  think  of 
how  oppressive  a  tax  of  $50,000  on  a  $5,000,000  corporate  income 
seemed  in  1909)  or  for  those  modest  and  retiring  surtax  rates 
which  under  the  1913  law  went  only  as  high  as  6  per  cent  on 
individual  incomes  of  $500,000  and  over. 

It  did  not  take  long  to  realize  that,  even  though  the  war 
was  over,  heavy  tax  burdens  would  continue  for  a  long  time. 
Also,  when  the  attack  on  the  excess  profits  tax  as  being  un- 
American,  undemocratic,  and  tending  to  discourage  business 
initiative  grew  strong.  It  was  seen  that  before  this  tax  could  be 
abandoned  it  would  be  necessary  for  Congress  to  see  some 
other  way  in  sight  by  which  the  revenue  necessary  could  be 
secured.  Consequently,  those  who  were  eager  to  eliminate  the 
excess  profits  tax,  and  at  least  to  reduce  very  substantially  the 
surtaxes  on  individual  incomes,  soon  realized  that  such  pro- 
posals would  be  considered  only  academic  and  would  receive  but 
little  serious  attention  unless  they  were  accompanied  by  practical 
suggestions  for  other  means  of  raising  the  needed  revenue. 


TAXATION  145 

Of  all  the  proposals  which  have  thus  far  been  made  for 
replacing  the  revenue  which  will  be  lost  by  abolishing  the 
excess  profits  tax  and  reducing  the  higher  surtaxes,  or  by  such 
sources  of  revenue  drying  up,  the  proposal  of  a  sales  tax  has 
been  pushed  with  the  greatest  vigor  and  supported  by  more 
energetic  and  extensive  propaganda  than  any  other. 

The  sales  tax  as  pictured  by  those  convinced  of  its  practi- 
cability is  most  alluring.  In  effect  we  are  told,  on  the  one 
hand,  that  it  is  so  simple  that  no  one  will  have  the  slightest 
difficulty  in  making  up  his  monthly  sales  tax  return  in  a  few 
odd  moments  one  evening  a  month,  that  the  tax  will  produce 
billions  of  national  revenue,  and  that  (Oh!  joyful  thought!) 
every  penny  of  the  tax  will  be  passed  on  to  the  ultimate  con- 
sumer, that  elusive  character  who  seems  to  be  in  a  class  with 
the  missing  link.  On  the  other  hand,  we  are  led  to  believe  that, 
even  though  the  ultimate  consumer  is  handed  for  payment  as 
a  part  of  his  grocery,  butcher,  and  haberdashery  bills,  such  a 
small  amount  of  tax  thereon  as  anywhere  from  $1,000,000,000  to 
$6,000,000,000,  the  tax  will  spread  out  so  thinly  over  our  large 
population  that  nobody  will  feel  it  and  that  the  difference  in 
the  family  exchequer  will  not  be  any  more  noticeable  than  if 
a  few  more  dimes  and  quarters  had  been  spent  for  amusement 
this  week  than  last. 

All  jesting  aside,  if  it  were  possible  to  institute  a  sales  tax 
which  would  accomplish  only  50  per  cent  of  what  is  claimed 
for  it,  it  would  be  a  wonderful  source  of  revenue.  Unfortunately, 
the  very  ease  with  which  it  is  claimed  such  a  tax  could  be 
levied,  would  be  a  temptation,  when  the  insistent  need  for 
large  revenues  has  somewhat  abated,  for  the  raising  of  public 
funds  in  unnecessary  amounts.  Such  funds  would  be  in 
danger  of  being  squandered  for  non-essential  public  purposes 
as  is  so  often  the  case  when  a  government  has  more  liquid 
funds  than  it  really  needs. 

The  purpose  of  this  article  is  to  examine  briefly  the  claims 
which  have  been  made  for  the  sales  tax,  and  to  discuss  them  in 
the  light  of  those  difficulties  which  it  has  been  pointed  out 
would  be  likely  to  be  encountered  in  attempting  to  institute 
and  administer  such  a  tax. 

Before  proceeding  to  the  consideration  of  the  matter  in  detail 
it  is  to  be  pointed  out  that  several  different  kinds  of  sales  taxes 
have  been  advocated.  There  is  the  general  turnover  tax  which 


146  SELECTED  ARTICLES 

proposes  to  levy  a  tax  of  say,  not  over  i  per  cent,  on  absolutely 
all  sales  or  turnovers  including  not  only  commodities  or  mer- 
chandise in  every  form  but  also  capital  transactions,  such  as 
sales  of  real  estate  and  securities,  services  such  as  those  ren- 
dered by  lawyers,  architects,  and  other  professional  men,  and 
rents  and  interest.  In  sharp  contrast  to  the  general  turnover 
tax  is  the  retail  sales  tax  which  proposes  to  levy  a  tax  of  say 
i  per  cent  (presumably,  however,  the  rate  would  have  to  be 
higher  if  anything  like  the  same  amount  of  income  is  to  be 
secured  as  under  the  general  turnover  tax)  on  those  sales  which 
are  made  to  the  ultimate  consumer,  in  other  words  retail  sales. 

Between  these  two  plans  is  still  another  which  would  lay 
a  tax  on  all  sales  excepting  those  which  represent  turnovers 
of  capital  or  which  are  service  earnings  rather  than  sales  of 
merchandise. 

The  principal  arguments  urged  in  support  of  the  plan  for 
some  one  of  the  three  forms  of  sales  tax  mentioned  above  have 
already  been  alluded  to.  They  are  briefly : 

That  the  tax  would  be  extremely  simple  of  calculation  and 
of  collection. 

That  the  tax  would  not  be  a  burden  to  business  as,  being 
at  a  uniform  rate  on  all  sales,  it  would  be  passed  on  to  the 
purchaser,  either  as  a  specific  item  or  as  a  part  of  the  sales 
price. 

That  the  tax  would  be  so  small  that  it  would  not  be  felt  by 
those  who  eventually  have  to  pay  it,  namely,  the  ultimate  con- 
sumer. 

Other  arguments  for  the  enactment  of  a  sales  tax  are  really 
only  variations  of  these  three. 

Let  us  now  hear  from  those  who  have  wondered  why  such 
a  perfect  tax  has  not  long  since  been  discovered  and  adopted 
by  all  progressive  nations  and  who  feel  certain  that  there  are 
fallacies  in  the  arguments  which  have  made  this  tax  so  alluring. 

For  purposes  of  discussion,  simplicity  of  calculation  may 
for  the  moment  be  conceded  for  the  general  turnover  tax.  The 
moment,  however,  we  depart  from  a  tax  which  is  imposed  upon 
absolutely  every  turnover  of  every  description,  difficulties  of 
calculation  involving  construction  and  interpretation  of  the  law 
will  surely  arise  just  as  much  as,  and  perhaps  even  more  than, 
has  been  the  case  under  our  excess  profits  tax  acts  and  even 
under  the  relatively  simple  income  tax  laws.  The  difficulties 


TAXATION  147 

involved  in  determining,  in  the  case  of  the  retail  sales  tax,  which 
sales  are  to  ultimate  consumers  and  which  are  to  others  and, 
therefore,  not  subject  to  tax,  can  easily  be  imagined.  The  oppor- 
tunity for  evasion  would  in  all  probability  be  greater  under  a 
retail  sales  tax  than  is  the  case  at  present  with  reference  to 
income  taxes.  In  principle  it  is  a  simple  thing  to  record  sales. 
Yet  it  is  an  astonishing  fact  that  many  business  concerns  and 
particularly  the  individual  retail  merchant  have  very  defective 
sales  records.  Those  who  have  struggled  with  the  analysis  of 
an  old-fashioned  merchandise  account  in  which  all  possible 
varieties  of  transaction,  debit  and  credit,  have  been  intermingled, 
may  have  some  conception  of  the  difficulties  of  calculation  and 
administration  where  each  sale  is  to  be  allocated  to  either  one 
of  two  groups:  one,  the  goats,  those  to  the  ultimate  consumer 
on  which  the  tax  is  to  be  paid,  and  the  other  the  sheep,  those 
which  are  not  responsible  for  imposing  a  burden  on  either  buyer 
or  seller  in  the  way  of  sales  tax. 

What  might  be  termed  the  merchandise  turnover  tax,  that  is 
the  tax  on  all  turnovers  on  merchandise,  excluding  capital 
transactions  and  charges  for  services,  would  also  develop  diffi- 
culties of  *  calculation  and  administration.  Just  where  to  draw 
the  line  between  the  sales  subject  to  the  tax  and  those  not 
subject  thereto  because  of  being  one  of  the  excluded  classes 
would  develop  perhaps  as  many  perplexities  as  have  resulted 
from  the  attempt  to  make  invested  capital  a  base  for  profits 
taxes.  Where  would  the  line  be  drawn?  For  instance,  what 
would  be  done  about  exchanges  of  property  or  exchanges  of 
merchandise?  How  about  sales  of  machinery  or  other  articles 
which  may  represent  merchandise  or  income-producing  sales  to 
the  seller  but  which  represent  a  capital  investment  by  the 
purchaser? 

Even  the  general  turnover  -tax,  with  all  its  apparent  sim- 
plicity, would  offer  difficulties  not  to  be  lightly  brushed  aside. 
There  would  almost  certainly  be  exemptions  created  sooner  or 
later  for  certain  classes  of  sales  or  turnovers  and,  with  any 
exceptions  whatever,  difficulties  of  classification  of  sales  would 
at  once  arise. 

Difficulties  of  administration  would  arise  through  the  incen- 
tive to  arrange  transfers  of  property  and  merchandise  in  such 
a  way  that  actual  sales  would  be  avoided  or  deferred.  For 
instance,  leasing  and  consignment  arrangements  would  probably 


148  SELECTED   ARTICLES 

be  widely  resorted  to.  Such  arrangements  in  place  of  the  out- 
right sale  of  goods  to  distributors  would  not  be  a  wholesome 
development  in  the  business  world.  Also,  it  would  tend  to 
increase  unnecessarily  the  difficulties  of  those  with  only  a 
moderate  capital,  sufficient  for  their  business  under  present 
methods  of  distribution  but  inadequate  for  carrying  goods  on 
a  consignment  or  lease  basis  until  disposed  of  by  the  distributor 
to  the  retailer.  Competition  would  tend  to  drive  businesses 
generally  into  such  arrangements  to  a  considerable  extent. 

Assistant  Secretary  of  the  Treasury  Leffingwell  is  quoted  as 
having  said  that  a  turnover  tax  would  in  five  years  revolutionize 
present  methods  of  doing  business,  because  means  of  getting 
around  the  intermediate  turnover  tax  would  be  devised  and 
put  into  effect.  Changes  in  business  methods  should,  however, 
come  as  a  result  of  economic  improvements  and  increased  effi- 
ciency, not  as  the  result  of  a  desire  to  avoid  a  tax  imposed  on 
business  and  tending  to  hamper  it. 

The  questions  which  have  been  raised,  as  to  whether  in  fact 
the  calculation  and  collection  of  the  tax  would  prove  to  be  as 
simple  as  proponents  of  the  sales  tax  believe,  are  not  as  serious 
as  those  which  relate  to  the  burden  on  business  or  the  possible 
unfair  distribution  of  the  tax  among  the  people  who  will  even- 
tually pay  it. 

Students  of  taxation  and  those  who  have  had  wide  oppor- 
tunity for  observation  of  the  working  of  the  taxes  in  practice 
have  challenged  very  sharply  the  claims  that  the  imposition  of 
a  uniform  rate  of  tax  would  be  absolutely  fair  as  between  one 
industry  and  another,  and  that  in  any  event  the  tax  could  not 
be  burdensome  to  business  as  it  would  be  shifted  to  the  con- 
sumer and  none  of  it  would  thus  be  borne  by  business  as  such. 
The  first  proposition  involves  the  second  because,  if  the  tax 
would  invariably  be  shifted,  it  would  make  but  little  ultimate 
difference  to  business  how  much  the  tax  was,  excepting  for  the 
temporary  inconvenience  perhaps,  of  having  to  pay  over  the 
tax  from  month  to  month  while  part  of  it  was  still  in  the  form 
of  accounts  receivable  yet  to  be  collected  from  customers. 

That  the  shifting  of  the  tax  would  not  be  the  simple  matter 
which  has  been  assumed  by  its  proponents  seems  to  be  quite 
evident  upon  consideration  of  a  few  every-day  facts.  It  would 
be  natural  to  assume  that  every  expense  incurred  by  a  manu- 
facturing or  mercantile  business  would  in  due  course  be  shifted 


TAXATION  149 

to  the  purchasers  of  its  products  or  merchandise.  Surely  no 
manufacturer  or  merchant  wants  to  absorb  any  expenses  which 
are  incurred  in  the  manufacture  or  sale  of  goods  and  yet  in 
practice  this  is  exactly  what  does  happen  to  many  concerns. 

Figures  recently  published  by  the  Commissioner  of  Internal 
Revenue  show  that  during  1918,  a  year  of  wonderful  business 
prosperity,  more  than  one-third  of  the  corporations  in  the  United 
States  made  no  profits  whatever.  Those  corporations  which 
did  report  profits  showed  great  variations  in  the  amount  realized. 
Not  only  was  there  variation  between  industries,  but  individual 
corporations  in  the  same  industry  showed  a  great  difference 
in  profits  realized.  If  in  a  sellers'  market,  when  prosperity  was 
enjoyed  by  many  concerns  which  for  years  before  the  war  had 
not  earned  a  fair  return  on  the  capital  invested  in  them  and 
when  corporations  were  supposed  to  have  passed  on  the  excess 
profits  tax  to  their  customers  time  and  time  again,  over  one- 
third  of  the  corporations  of  the  country  earned  no  profit  at  all, 
is  it  reasonable  to  suppose  that  under  competitive  conditions  (to 
which  we  are  rapidly  returning,  if  in  fact  we  have  not  already 
arrived),  every  business  concern  will  invariably  succeed  in 
passing  on  the  sales  tax  to  its  customers,  and  this  neither  more 
nor  less  than  the  amount  of  the  tax  paid  by  it  to  the  government? 

How  would  public  utilities  whose  rates  are  regulated  by  law 
pass  on  the  tax?  Or  even  if  a  street  railway,  which  charges 
anywhere  from  5  to  loc.  per  ride,  is  authorized  to  pass  on  the 
tax,  how  is  it  to  do  so  in  practice?  On  a  5c.  fare  the  tax  would 
be  only  5/100  of  a  cent;  if  a  full  cent  additional  is  collected, 
the  tax  is  being  passed  on  twenty  fold,  whereas  if  it  is  not 
passed  on  because  of  its  trifling  amount  in  the  case  of  the 
individual  fare,  it  would  aggregate  a  large  amount  in  the  total 
gross  earnings  and  impose  a  heavy  charge  on  the  net  profits. 

In  an  editorial  in  the  New  York  Times  of  February  5,  1921 
entitled,  "The  Profits  Tax  Must  Go,"  appeared  the  following 
statement : 

A  flagrant  instance  of  the  vicious  character  of  the  tax  imposed  upon 
corporations  in  this  country  is  disclosed  in  the  annual  statement  of  Mont- 
gomery, Ward  &  Co.  of  Chicago.  With  net  sales  in  1920  amounting  to 
$101,745,270,  the  company  shows  losses  of  $7,855,278,  including  deprecia- 
tion. Yet  during  this  year  of  loss  the  Federal  Government  took  from  the 
company  $860,326  in  taxes  upon  business  of  the  year  1919. 

The  writer  of  the  editorial  apparently  overlooked  the  fact 
that  with  I  per  cent  sales  tax  in  force  the  company  would  not 
have  paid  $860,326  of  profits  and  income  taxes  upon  the  profitable 


ISO  SELECTED   ARTICLES 

business  of  the  preceding  year,  but  a  $1,017,452  tax  on  the 
sales  of  the  current  year.  Also,  he  overlooked  the  fact  that 
had  the  year  1919  not  been  a  profitable  one  for  the  company, 
it  would  not  have  had  to  pay  excess  profits  and  income  tax, 
whereas  the  sales  tax,  had  one  been  in  force,  would  have  had  to 
be  paid  regardless  of  whether  the  year's  business  resulted  in  a 
gain  or  in  a  loss. 

If  the  reply  were  made  that  had  the  sales  tax  been  in  force 
it  would  have  been  passed  on  to  the  company's  customers,  the 
question  may  well  be  asked,  why  was  not  the  loss  of  $7,855,278 
passed  on?  The  same  circumstances  which  caused  this  company 
to  lose  money  on  its  1920  business  would  in  all  probability 
have  caused  it  to  forego,  whether  it  wanted  to  or  not,  the  passing 
on  of  the  sales  tax  to  its  customers. 

If  the  sales  tax  cannot  be  invariably  shifted  in  its  entirety 
it  becomes  a  tax  on  gross  earnings  and  would  in  very  many 
businesses  be  far  more  burdensome  than  the  excess  profits  tax 
has  been.  Many  businesses,  particularly  in  lines  handling  staple 
commodities  such  as  meats,  groceries,  dry-goods,  hardware,  and 
the  like,  are  conducted  on  very  small  margins  of  profits.  The 
published  reports  of  Swift  and  Company,  the  meat  packers,  show 
that  during  the  ten  years  from  1911  to  1920  the  highest  net 
profit  per  annum  on  sales  was  3.96  per  cent  in  1917  and  the 
lowest  .44  per  cent  (less  than  I  per  cent)  in  1920.  Before  the 
war  there  were  many  mercantile  businesses  which  were  thought 
to  be  doing  very  well  indeed  if  they  cleared  net  from  2  to  3 
per  cent  on  their  gross  sales  for  the  year.  A  uniform  rate  of 
tax  for  all  businesses  regardless  of  the  fact  that  some  are 
conducted  on  a  margin  as  low  as  that  mentioned,  while  in  some 
other  lines,  such  as  special  manufacturing  or  the  like,  the  rate 
of  net  profit  may  even  in  normal  times  be  from  10  to  15  per 
cent  of  the  sales,  shows  how  unfair  a  uniform  rate  of  tax 
would  be. 

The  continued  emphasis  on  the  low  rate  of  a  sales  tax  is 
likely  to  mislead  one  who  does  not  give  the  matter  very  thorough 
/consideration.  It  must  continually  be  borne  in  mind  that  the 
•/  tax  is  on  gross  business  and  not  on  net  profits.  Hence,  the  tax 
while  expressed  in  a  small  rate  may  nevertheless  amount  to  a 
large  percentage  of  the  net  profits,  especially  in  the  case  of 
those  businesses  having  a  large  turnover  with  a  small  margin 
of  profit.  Rain  descends  in  the  form  of  drops  of  water,  each 


TAXATION  151 

drop  small  in  itself,  but  when  there  are  enough  of  them  a 
cloudburst  is  the  result. 

Aside  from  the  injustice  of  imposing  a  uniform  rate  of 
sales  tax  on  all  businesses,  regardless  of  the  fact  that  some 
industries  yield  a  much  larger  return  per  dollar  of  turnover 
than  others,  another  discriminatory  result  appears  because  of 
the  greater  number  of  processes  or  operations  performed  by 
one  business  as  compared  with  another.  This  question  was 
thoroughly  considered  by  the  Tax  Committee  of  the  National 
Industrial  Conference  Board  and  was  made  the  subject  of  the 
following  illuminating  comment  in  the  Committee's  report. l 

If  a  I  per  cent  turnover  tax  were  imposed  upon  each  step 
in  the  cotton  industry  it  would  fall  upon  the  following  sales : 

Raw  cotton  to  ginning  mill. 

Ginner  to  spinner. 

Spinner  to  mercerizer. 

Mercerizer  to  dyer. 

Dyer  to  weaver. 

Weaver  to  finisher. 

Finished  cloth  through  agent  to  wholesaler. 

Wholesaler  to  retailer. 

There  are  many  textile  plants  which  buy  the  cotton  from  the 
ginning  mill  and  sell  the  finished  cloth  through  their  own  selling 
organization  to  the  wholesaler  and  retailer,  thereby  eliminating 
one-half  of  these  steps.  It  is  claimed  that  the  advantage  which 
the  large  mill  carrying  on  several  consecutive  steps  would  have 
over  its  smaller  competitors,  is  small  compared  to  the  advantage 
which  it  now  has  through  the  profits  made  from  each  process. 
Such  a  contention  ignores  the  fact  that  profit  should  be  measured 
as  a  percentage  on  the  business  investment,  and  that  a  business 
concentrating  on  one  process  and  investing  all  its  money  in 
that  one  process  may  earn  as  large  a  return  on  its  capital  as 
the  competitor  who  spreads  his  capital  over  several  processes, 
and  should,  to  be  equally  successful,  earn  as  much  profit  on 
each  process  as  competitors  carrying  on  separate  processes. 
Single-process  businesses  are  therefore  able  to  compete  success- 
fully with  those  which  carry  on  multiple  processes.  A  turnover 
tax  would  discriminate  against  them.  Regardless  of  whether 
the  advantage  which  such  a  tax  would  give  to  the  self-contained 
operator  is  large  or  small,  it  is  questionable  whether  the 

1  Special   Report  No.    18.     December,   1920. 


152  SELECTED   ARTICLES 

Government  should  levy  a  tax  that  would  have  even  a  tendency 
to  drive  smaller  enterprises  out  of  business. 

A  second  illustration  applies  to  the  shoe  industry.  In  cases 
where  each  operation  is  carried  on  separately,  a  turnover  tax 
would  be  levied  on  the  sales  of: 

Hides  to  tanner. 

Tanner  to  leather  merchant. 

Leather  merchant  to  shoe  manufacturer. 

Shoe  manufacturer  to  jobber. 

Jobber  to  retailer. 

Retailer  to  consumer. 

At  least  one  large  shoe  manufacturer  tans  his  own  hides  and 
sells  the  finished  shoes  through  his  own  chain  of  retail  stores 
to  the  consumer.  It  has  been  estimated  by  one  of  the  prominent 
advocates  of  the  sales  tax  that  in  this  case  the  cumulative  tax 
saved  by  the  large  shoe  manufacturer  would  be  approximately 
3  per  cent.  This  is  undoubtedly  an  underestimate,  but  the 
Committee  is  informed  that  3  per  cent  on  their  gross  sales  is 
as  much  as  the  average  net  profits  of  some  leading  shoe  manu- 
facturers in  pre-war  times,  as  shown  by  the  published  reports 
of  their  earnings. 

A  third  illustration  is  offered  by  following  the  course  of 
any  common  tool,  such  as  a  shovel,  pick  or  axe,  through  the 
two  extremes  of  the  greatest  compared  to  the  least  number  of 
turnovers.  In  the  one  case  the  tax  would  be  paid  on  the  sale  of : 

Iron  ore,  limestone  and  coke  to  make  pig  iron. 

Pig  iron  and  coke  to  make  steel  ingots  or  billets. 

Steel  ingots  or  billets  sold  to  rolling  mill  to  make  bar  steel. 

Bar  steel  sold  to  tool  manufacturer. 

Tool  sold  to  wholesale  dealer   (the  customary  practice). 

Tool   sold   to   retailer. 

Tool  sold  to  consumer. 

If  a  certain  well  known  corporation  which  combines  all  the 
steps  from  ore  to  bar  steel  furnished  the  steel  to  the  tool  manu- 
facturer and  he  sold  it  to  one  of  the  large  mail-order  houses, 
there  would  be  only  the  tax  on  the  sale  of  the  bar  steel,  on  the 
sale  of  the  mail-order  house,  and  on  the  sale  to  the  consumer. 

It  "may  be  claimed  that  the  first  three  taxes  are  so  small  a 
proportion  of  the  cost  of  the  tool  that  their  elimination  would 
make  little  difference.  It  must  be  borne  in  mind,  however,  that 
this  same  elimination  would  occur  in  many  of  the  other  items 
of  cost  in  the  manufacture  of  the  tool.  It  would  apply  to  the 


TAXATION  153 

manufacturer  of  the  handle.  One  manufacturer  might  make 
the  handle  from  his  own  timber,  cut  and  shipped  by  his  own 
men,  and  another  might  have  to  buy  handles  made  from  timber 
bought  from  timber  owners,  cut  and  shipped  by  handle  blank 
makers,  and  turned  into  handles  by  a  handle  maker,  thereby 
paying  three  taxes.  It  would  apply  to  coal  for  power,  which  in 
one  case  might  be  shipped  directly  from  the  mine  and  in  another 
case  pass  from  the  mine  owner  to  the  commission  merchant, 
to  the  coal  dealer,  to  the  manufacturer.  It  would  apply  to  the 
belting  to  drive  the  machinery,  to  the  machinery  itself  when 
purchased,  and  to  the  countless  supplies  used  to  operate  the 
factory.  The  elimination  of  any  of  the  processes  of  distribution 
would,  of  course,  eliminate  the  tax  on  substantially  the  total 
cost  of  the  tool.  Average  records  in  the  hardware  business 
show  that  the  wholesaler  who  distributes  such  tools  does  not 
in  normal  times  realize  net  profits  of  more  than  about  2}4  per 
cent  of  his  gross  sales,  so  that  the  elimination  of  this  one  tax 
through  sales  directly  to  a  retailer  would  be  equivalent  to  about 
40  per  cent  of  the  net  income  derived  from  such  sales  by  a 
wholesaler.  How  could  such  a  tax  be  shifted  in  competition 
with  those  who  do  not  pay  the  tax?  Supposing  that  a  general 
sales  tax  would  be  figured  by  every  business  as  an  item  of  cost, 
can  it  be  assumed  that  certain  businesses  would  be  able  to  shift 
a  tax  which  their  competitors  did  not  have  to  pay? 

Even  if  it  were  generally  conceded  that  the  tax  can  be 
passed  on  to  the  consumer  in  its  entirety,  that  it  will,  therefore, 
not  be  burdensome  to  business,  and  that  the  rate,  even  though 
uniform  for  all  lines  of  businesses,  is  not  material,  the  serious 
question  still  remains  whether  the  tax,  when  it  is  eventually 
paid  by  the  consumer,  results  in  a  just  distribution  of  the 
country's  tax  burden.  This  is  the  viewpoint  from  which  per- 
haps the  most  serious  attack  has  been  made  on  any  form  of 
general  sales  tax.  One  of  the  fundamentals  of  wise  taxation 
which  has  become  increasingly  recognized  from  the  days  of 
Adam  Smith  down  is  that  a  tax  should  be  levied  according  to 
ability  to  pay.  So  long  as  in  the  apportionment  of  the  country's 
produce — the  result  of  productive  effort — we  make  a  discrimin- 
ating distribution,  i.e.,  a  larger  portion  to  him  who  renders  the 
larger  service,  or  in  other  words,  reward  according  to  ability 
to  earn  or  serve,  we  must  expect  to  apportion  the  fiscal  burdens 
of  the  country  in  like  manner,  i.e.,  according  to  ability  to  pay. 


154  SELECTED  ARTICLES 

A  tax  on  consumption  does  not  fall  according  to  ability  to 
pay  but  in  reality  is  laid  according  to  one's  needs.  The  mere 
fact  that  within  certain  limits  one  may  increase  or  decrease  his 
consumption  does  not  really  alter  the  situation.  The  great 
majority  of  the  population  of  any  country  are  people  who  with 
their  best  efforts  earn  but  a  modest  income  and  are  bound  by 
circumstances  to  disburse  the  major  portion  of  it  as  fast  as 
earned  for  necessary  living  expenses.  To  be  sure,  during  the 
war  certain  classes  of  workers  enjoyed  most  unusual  prosperity 
and  spent  their  earnings,  many  of  them,  in  an  unusually  extrav- 
agant manner.  Opportunity  for  repeating  the  performance  has 
disappeared  for  most  of  them  and  present  business  conditions 
give  no  hint  of  a  recurrence  in  the  near  future. 

Assuming  that  wages  have  returned,  as  they  are  now  in  the 
process  of  doing,  to  a  normal  basis  and  that,  saying  nothing  of 
workers  who  are  out  of  employment,  the  worker  is  earning 
but  little  more  than  sufficient  to  maintain  himself  and  his 
family,  what  is  the  effect  of  levying  a  sales  tax  which  would 
produce  say  $2,000,000,000  annually?  There  are  about  one  hun- 
dred million  people,  including  men,  women,  and  children,  in  the 
United  States,  and  this  amount  of  tax  would  mean  about  $20 
per  capita.  If  the  tax  is  to  fall  on  consumption,  that  is,  on 
needs  rather  than  on  ability  to  pay  as  indicated  by  income,  why 
not  save  all  the  trouble  of  passing  the  tax  through  the  myriad 
channels  of  hundreds  of  thousands  of  business  enterprises  and 
levy  it  directly  on  every  man,  woman  and  child  in  the  United 
States  ?  In  other  words,  levy  a  poll  tax  of  $20  per  capita.  This 
would  mean  that  the  workman  having  a  family  consisting  of 
wife  and  three  children  (the  average  family  in  the  United 
States  is  usually  considered  to  consist  of  five  persons,  though 
the  number  averages  probably  higher  among  the  poorer  classes 
and  lower  among  the  well-to-do)  would  have  to  pay  $100  poll 
taxes  for  the  family. 

When  it  is  remembered  that  before  the  war  the  average 
annual  income  of  a  worker  in  the  United  States  was  not  over 
$700 — it  was  usually  stated  at  a  somewhat  lower  figure — and 
that  even  with  the  high  cost  of  living  during  recent  years  it  did 
not  rise  to  more  than  $1,300,  if  that  much,  the  hopelessness, 
not  to  mention  the  injustice,  of  attempting  to  collect  such  a 
tax  from  the  working  class  is  obvious.  Of  course,  the  con- 
sumption expenditures  of  the  well-to-do  average  somewhat  more 


TAXATION  155 

per  capita  than  is  the  case  among  the  wage-earners,  but  it  is  not 
likely  that  they  would  average  enough  higher  to  reduce  the 
per  capita  out  of  a  $2,000,000,000  sales  tax  to  lower  than  $17  or 
$18  for  the  working  classes.  It  is  not  to  be  overlooked  that 
the  living  expenses  of  well-to-do  people  include  items  which 
would  not  be  subject  to  the  sales  tax,  such  as  wages  of  servants, 
while  presumably  but  little  which  the  wage-earner  purchases 
would  escape  the  tax. 

E.  R.  A.  Seligman,  who  is  perhaps  the  greatest  authority  on 
taxation  in  this  country  today,  makes  the  following  significant 
comment  on  this  subject: 

The  proposition  now  is  to  take  off  one  of  those  three  chief  categories — 
the  tax  on  excess  profits — and  remove  the  burden  from  profits  on  wealth 
or  income,  and  put  it  on  the  other  or  consumption  side.  This  would,  in 
my  opinion,  unduly  shift  the  balance  and  bring  us  too  near  the  position 
formerly  occupied  by  all  the  aristocracies  of  old,  and  still  reflected  in 
some  of  the  European  countries.  .  .  Why  is  it  that  England  and 
America  show  their  democracy,  their  real  democracy,  so  much  more  than 
countries  in  the  difficult  position  of  Italy,  or  France,  or  Germany?  There 
you  will  find  throughout  the  war,  and  even  now,  the  great  mass  of  taxes 
imposed  upon  the  consumption  of  the  common  man;  whereas  in  England 
and  in  the  United  States  during  the  Great  War,  as  over  against  our  ex- 
periences in  the  Civil  War,  the  great  majority  of  taxes  are  raised  from 
wealth;  that  is,  from  those  who  can  afford  to  pay,  rather  than  from  the 
consumption  of  the  necessaries  and  comforts  of  life.  .  .  After  the 
United  States,  the  two  countries  of  the  world  which  are  making  the  most 
progress  in  fiscal  reform  are  England  and  Italy — for  Italy  is  doing  better 
than  France.  When  these  two  countries  came  to  consider  this  problem 
they  went  into  the  question  of  a  sales  tax  thoroughly  and  finally  rejected 
it.  On  the  other  hand,  the  two  big  countries  of  the  world  that  have 
adoped  the  sales  tax,  Germany  and  France,  did  so  only  as  a  last  resort, 
after  exhausting  every  other  available  source  of  taxation.  .  .  Germany 
was  forced  to  this  sales  tax  in  the  last  extremity,  and  in  France  the  same 
is  true. 

A  sales  tax  on  the  sales  of  capital  would  ruin  New  York 
City  as  the  financial  center  of  the  country.  A  sales  tax  on  the 
necessaries  of  life  would  evoke  a  political  struggle  the  like  of 
which  we  have  never  seen  in  this  country. 

The  sales  tax  represents  an  attempt  to  put  an  undue,  an 
extravagant  burden  upon  the  consumer,  instead  of  on  the  pro- 
ducer or  the  possessor  of  wealth. l 

Professor  Seligman's  reference  to  the  history  of  sales  tax- 
ation directs  attention  to  the  statements  made  by  its  proponents 
that  the  sales  tax — presumably  of  the  same  general  nature  as 
that  proposed  for  adoption  in  this  country — is  in  successful  use 
in  the  Philippines,  Mexico,  Canada,  and  France.  The  facts,  as 
far  as  the  writer  has  been  able  to  ascertain  them,  appear  to  be 
about  as  follows: 

1  Extracts  from  statements  to  the  Tax  Committee  of  the  National  In- 
dustrial Conference  Board. 


156  SELECTED   ARTICLES 

PHILIPPINE  ISLANDS.  A  former  collector  of  internal 
revenue  in  the  islands  who  lays  claim  to  having  drawn  the  plan 
for  the  sales  tax  in  force  there,  attracted  considerable  attention 
by  an  address  on  the  subject  recently  delivered  before  the 
Chamber  of  Commerce  of  the  State  of  New  York.  He  stated 
that  the  tax  is  being  successfully  administered,  is  the  biggest 
revenue  producing  factor  in  the  Islands  and  that  it  is  satis- 
factory to  taxpayers. 

For  several  reasons,  however,  the  sales  tax  in  the  Philip- 
pines— even  if  it  be  granted  that  it  is  all  its  originator  claims 
for  it,  though  there  are  not  lacking  former  residents  of  the 
Islands  who  do  not  concede  all  that  is  claimed  for  it — is  of 
little  help  in  indicating  what  the  experience  with  a  general  sales 
tax  in  the  United  States  would  be.  In  the  first  place,  there  is 
comparatively  little  manufacturing  in  the  Philippines ;  the  indus- 
tries are  principally  of  an  agricultural  character  and  the  other 
business  is  of  that  mercantile  character  which  is  naturally 
affiliated  with  agricultural  pursuits.  In  the  United  States,  on 
the  other  hand,  manufacturing  through  many  operations,  start- 
ing from  the  raw  materials  and  progressing  to  highly  refined 
products,  forms  an  enormous  volume  of  the  country's  industry. 
It  follows  that,  under  the  simple  kinds  of  industry  in  the  Philip- 
pines, involving  relatively  few  turnovers  between  origin  or 
arrival  of  commodities  in  the  Islands  and  their  final  consumption 
or  exportation,  pyramiding  of  the  sales  tax  might  not  be  great. 
In  the  United  States,  however,  with  its  highly  integrated  indus- 
try, the  number  of  turnovers  between  origin  of  the  raw  materials 
to  the  final  consumption  or  sale  to  other  countries  would  be  so 
large  that  the  pyramiding  or  accumulation  of  sales  tax  through 
the  various  steps  of  production  and  distribution  would  be  most 
serious.  Furthermore,  the  inevitable  discrimination  against  the 
single-process  manufacturer  in  favor  of  the  multiple-process 
manufacturer  or  combination  manufacturer-distributor  would  be 
a  most  undesirable  economic  condition,  an  irritating  element 
in  the  business  organization  of  the  country  and  a  possible  source 
of  political  disturbance. 

After  considering  the  utter  dissimilarity  of  business  con- 
ditions in  the  Philippines  from  those  in  the  United  States, 
attention  is  to  be  directed  to  the  yield  of  the  tax  in  the  Philip- 
pines. The  annual  report  of  the  Collector  of  the  Internal 
Revenue  of  the  Philippine  Islands  shows  that  from  revenue 


TAXATION  15? 

collections  aggregating  during  the  calendar  year  1919  approxi- 
mately $27,000,000  about  $7,000,000  came  from  merchants,  manu- 
facturers, common  carriers,  etc.,  as  "license,  business,  and  occu- 
pation taxes."  This  appears  to  be  the  caption  under  which  the 
sales  tax  collections  are  included,  though  it  is  not  clear  thai 
the  $7,000,000  was  produced  entirely  by  the  sales  tax. 

Inasmuch  as  the  population  of  the  Philippines  is  approxi- 
mately eight  million,  the  sales  tax  collections,  the  rate  being 
I  per  cent,  were  less  than  $i  per  capita  of  population.  At  the 
same  rate  of  collection  per  capita  the  annual  yield  in  the  United 
States  would  be  less  than  $100,000,000,  a  comparatively  negligible 
figure  when  considering  the  high  sums  of  revenue  we  must 
raise  for  some  years  to  come.  On  the  other  hand,  advocates  of 
the  adoption  of  a  sales  tax  in  this  country  estimate  the  collections 
anywhere  from  $1,000,000,000  to  $6,000,000,000.  The  lowest  of 
these  would  amount  to  a  per  capita  average  of  $10,  more  than 
ten  times  that  realized  in  the  Philippines,  and  the  highest  amount 
would  average  $50  per  capita.  A  little  study  of  these  figures 
makes  it  obvious  that  it  would  be  absolutely  unsafe  to  base  any 
experiments  in  the  United  States  on  the  experience  in  the 
Philippines. 

MEXICO.  Is  it  not  rather  humiliating  to  have  the  taxing 
system  of  Mexico  held  up  to  us  as  a  model  to  be  followed  by 
the  United  States?  The  finances  of  Mexico  do  not  give  evidence 
of  having  been  either  well-planned  or  well-handled  and  while 
we  all  recognize  that  the  continuous  disturbances  have  in  a 
measure  been  responsible  therefore,  it  is  to  be  borne  in  mind  that 
none  of  the  Latin  countries  of  modern  times  has  been  so  suc- 
cessful in  dealing  with  national  finances  as  to  be  a  model  to 
the  Anglo-Saxon  nations. 

Incidentally,  H.  B.  Fernald  makes  the  positive  statement1 — 
that  "It  (sales  tax)  can  be  eliminated;  it  can  be  gotten  around. 
The  experience  in  Mexico  has  shown  that  conclusively,  and 
therefore  it  is  a  tax  which  will  be  paid  by  the  small  man,  while 
the  large  man,  who  is  able  to  change  his  business  organization 
can  avoid  it." 

CANADA.  The  sales  tax  in  Canada,  whatever  it  may  orig- 
inally have  been  intended  to  be  is  not  at  all  the  kind  of  general 
sales  tax  which  has  been  ardently  advocated  for  imposition  in  the 
United  States.  Many  foodstuffs,  coal  and  other  necessities,  are 

1  Congressional    Record.     60:2474. 


158  SELECTED   ARTICLES 

exempt  from  the  tax,  the  law  grants  power  to  the  Governor 
in  Council  to  add  to  the  exemption  list,  the  tax  is  imposed  on 
manufacturers,  wholesalers,  and  jobbers  (not  on  retailers),  and 
while  nominally  at  a  uniform  rate  is  in  fact  in  addition  to 
numerous  excise  or  luxury  taxes  at  varying  rates  previously 
imposed  on  many  of  the  same  commodities. 

Also,  it  is  not  to  be  overlooked  that  the  Canadian  tax  is  of 
very  recent  origin  and  has  not  been  in  effect  long  enough  to 
serve  as  a  safe  basis  for  conclusions  as  to  its  efficacy  and  the 
wisdom  of  this  form  of  taxation. 

FRANCE.  The  sales  tax  in  France  is  likewise  of  such  recent 
enactment  that  conclusions  respecting  it  cannot  have  a  very 
satisfactory  basis.  From  the  standpoint  of  fiscal  results,  at  least, 
it  has  been  very  disappointing.  The  August  and  September,  1920, 
collections  were  much  less  than  one-half  the  amount  estimated 
for  the  budget,  which  was  ascribed  in  part  to  the  newness  of 
the  tax.  A  recent  issue  of  the  Revue  de  Legislation  Financiere, 
contains  a  statement  showing  that  later  collections,  those  of 
December,  1920,  were  still  very  unsatisfactory,  being  only  about 
50  per  cent  of  the  budget  estimate.  Reports  from  France,  also 
indicate  that  there  is  great  dissatisfaction  with  the  tax,  not  only 
on  the  part  of  the  consuming  public,  but  by  the  merchants. 

In  concluding  this  discussion  of  the  sales  tax  the  writer 
would  like  to  quote  the  following  comment  by  Arthur  A.  Bal- 
lantine,  formerly  Solicitor  of  Internal  Revenue,  on  the  fallacies 
of  the  sales  tax: 

"I  believe  that  this  idea  of  a  sales  tax,  a  tax  collected 
everywhere,  falling  on  no  one,  is  a  will-o'the-wisp  which  has 
floated  over  this  field  of  taxation  and  which  is  in  danger  of 
luring  business  men  who  approach  Congress  in  an  effort  to 
get  really  beneficial  changes  into  futile  action  instead  of  con- 
structive action. 

"I  believe  that  this  committee,  by  the  very  careful  and  exhaus- 
tive consideration  which  it  has  given  to  the  advocates  of  this 
plan  and  its  careful  thought  as  to  conclusions,  has  done  much  to 
\    dissipate  this   myth  and  to  direct  the  efforts  of  business   men 
1  into  practical  channels  instead  of  down  a  pathway  which  leads 
to   futility."1 

1  Remarks  at  a  meeting  of  the  Tax  Committee  of  the  National  Indus- 
trial Conference  Board;  quoted  in  Congressional  Record.  60:2473. 


TAXATION  159 


SALES  TAX— AN  INIQUITOUS  PROPOSAL 1 

It  is  expected  on  every  hand  that  the  present  session  of 
Congress  will  in  some  manner  revise  the  system  by  which  federal 
revenues  are  derived.  Whether  the  congressional  rearrange- 
ment of  taxation  will  be  wise  or  unwise  remains  to  be  seen, 
but  if  congressional  action  in  some  other  directions  is  to  be 
accepted  as  a  guide,  it  will  require  much  effort  to  keep  new 
taxation  legislation  from  running  wild. 

Perhaps  the  most  iniquitous  proposal  that  has  been  considered 
by  congressmen  in  the  field  of  taxation  is  the  sales  tax  as  a 
substitute  for  the  existing  excess  profits  tax.  It  would  be 
difficult  to  devise  a  system  of  taxation  more  inequitable  and 
more  unjust  than  a  sales  tax.  It  would  be  far  better  to  leave 
the  system  of  taxation  as  it  is  even  with  all  of  the  inequalities 
of  the  income  and  excess  profits  taxes  than  to  substitute  these 
with  the  sales  tax. 

Under  the  sales  tax  as  proposed,  a  tax  would  be  levied  on 
practically  every  commodity  of  general  use  and  every  turnover. 
That  is  to  say,  that  every  pound  of  sugar  for  example  would  be 
subject  to  a  tax  with  every  transaction  from  plantation  to 
consumer.  Illustrating  the  consequences  of  the  sales  tax,  Con- 
gressman James  E.  Frear  of  Wisconsin,  on  January  31,  1921, 
said  in  a  speech  in  the  House: 

There  are  practically  nine  turn-overs  in  the  case  of  cotton  and  woolen 
goods;  eight  turn-overs  in  the  case  of  leather  goods,  and  seven  or  eight 
in  the  case  of  steel,  that  is,  from  the  original  ore  up  to  the  time  of  the 
finished  article;  what  applies  to  these  articles  applies  with  equal  force  to 
almost  everything  we  use.  In  other  words,  this  proposed  tax  of  i  cent 
on  each  turn-over  has  to  be  applied  from  five,  six  and  seven  to  nine  times. 
You  will  find  that  in  many  cases  where  the  present  tax  on  luxuries  is 
imposed  they  have  raised  the  price  of  the  goods  sometimes  400  per  cent 
during  the  different  turn-overs. 

Congressman  Frear  has  not  in  any  sense  over-estimated  the 
inequity  of  the  sales  tax.  While  all  taxes  rest  more  heavily  upon 
the  poor  than  upon  the  rich,  the  sales  tax  would  be  more  unjust 
in  this  direction  than  any  others.  It  is  a  matter  of  common 
knowledge  that  the  purchases  of  the  poor  usually  are  made  in 
small  quantities  and  consequently  at  the  highest  prices.  For 
that  reason  alone,  the  poor  would  pay  on  any  given  quantity 
or  commodity  a  tax  several  times  as  large  as  the  tax  paid  by 

1  By  Samuel   Gompers.    American    Federationist.     28:495-7.     June,    1921. 


160  SELECTED   ARTICLES 

the  well-to-do,  whose  purchases  would  be  smaller  in  number, 
but  larger  in  bulk. 

The  sales  tax  has  no  scientific  justification  and  no  utilitarian 
justification.  It  is  nothing  more  than  a  hodge  podge  proposal 
conceived  much  as  most  of  our  tariff  legislation  has  been  con- 
ceived. Unless  the  object  of  Congress  is  to  place  upon  the 
people  the  heaviest  and  most  awkward  burden  possible,  and 
to  leave  the  question  of  revenue  further  from  solution  than  it 
is  at  present,  the  idea  of  the  sales  tax  should  be  abandoned 
immediately. 

There  is  room  for  improvement  in  both  the  income  and  the 
excess  profits  tax  and  it  will  be  well  for  Congress  to  give  some 
inheritance  taxation.  It  is  possible  to  so  rearrange  the  income 
tax  as  to  provide  a  more  equitable  distribution  of  the  burden 
imposed  and  to  take  from  the  tax  some  of  the  inexcusable 
awkwardness  that  now  attends  its  imposition  and  its  collection. 
There  has  been,  and  there  is,  much  agitation  for  the  repeal  of 
the  income  tax,  or  at  least  for  higher  exemption  figures.  If 
it  is  possible  to  raise  the  limit  of  exemption  or  to  impose  a 
lighter  rate  of  taxation  upon  the  lower  incomes,  that  should  be 
done,  but  the  tax  itself  is  right  in  principle  and  should  be 
retained.  The  same  is  to  be  said  in  the  case  of  the  excess 
profits  tax.  Many  large  corporations  and  representatives  of 
vested  interests  are  endeavoring  to  secure  the  repeal  of  the 
excess  profits  tax  because  of  the  "burden"  it  is  claimed  to  impose 
upon  the  corporations  whose  profits  are  large.  They  desire,  of 
course,  to  escape  as  much  taxation  as  possible,  but  while  their 
efforts  are  understandable  they  should  not  be  permitted  to 
succeed.  Experience  should,  by  this  time,  have  provided  a  guide 
to  a  proper  rectification  of  the  excess  profits  tax  so  that  the 
burden  may  be  more  properly  distributed  and  the  total  revenue 
increased. 

What  has  happened  to  the  excess  profits  tax  as  it  stands  is 
that  corporations  have  devised  every  possible  method  to  escape 
payment  by  means  of  so  spending  their  money  as  to  dissipate 
their  taxable  excess.  To  do  this  corporations  have  plunged  into 
great  advertising  campaigns  far  in  excess  of  their  needs,  with 
the  result  that  the  amount  of  taxable  excess  has  in  many  cases 
been  reduced  to  an  absolute  minimum.  Other  corporations  have 
entered  into  the  construction  of  buildings  and  like  projects 
purely  in  order  to  expend  the  surplus  and  avoid  the  payment 


TAXATION  161 

of  tax.  While  this  is  beneficial  from  the  standpoint  of  stimulat- 
ing business  and  industry,  it  is  detrimental  so  far  as  federal 
revenue  is  concerned,  because  it  defeats  the  tax  and  leaves  the 
government  without  a  revenue  anticipated  and  upon  which 
account  has  been  taken.  A  moderation  of  the  tax  undoubtedly 
would  result  both  in  less  hardship  and  in  a  greater  revenue. 

Another  method  of  taxation  being  considered  by  members 
of  Congress  is  the  land  tax.  There  is  much  opposition  to  a 
land  tax,  and  doubtless  much  misunderstanding  of  it.  Perhaps 
no  tax  is  more  equitable  than  a  properly  administered  land  tax. 
It  is  doubtful  whether  the  present  Congress  would  agree  to  a 
land  tax,  but  if  it  were  possible,  neither  the  wage-workers  of 
the  cities  nor  the  farmers  of  the  country  should  oppose  the 
measure.  The  chief  opponents  of  the  land  tax  undoubtedly 
are  those  who  hold  large  tracts  of  land  for  speculative  purposes, 
and  those  who  hold  land  valuable  for  its  mining  resources.  The 
land  tax  constitutes  a  penalty  upon  idle  and  unused  land  and 
should  rest  comparatively  light  upon  the  owners  of  small  prop- 
erties upon  which  they  make  their  living. 

The  principal  concern  at  this  time,  however,  is  that  the  pro- 
posal for  a  sales  tax  be  defeated.  Of  all  forms  of  taxation 
either  in  existence  or  contemplation,  none  is  more  iniquitous  and 
none  would  in  the  long  run  work  greater  injury  to  the  masses 
of  our  people  or  develop  greater  resentment  among  them.  If 
we  cannot  have  a  truly  scientific  program  of  taxation,  let  us 
at  least  not  have  the  ultimate  in  chaos. 


SUBSTITUTES  FOR  THE  PROFITS  TAX  1 

Excess  profit  appears  to  the  New  Republic  an  eminently 
proper  subject  for  taxation.  It  is  the  income  from  which  the 
state  can  take  a  share  with  the  least  hardship  to  the  taxpayer. 
A  profits  tax,  scientifically  levied  and  efficiently  administered, 
is  from  this  point  of  view  a  good  tax.  Our  present  tax  is 
imperfect,  but  one-half  the  energy  that  is  expended  in  working 
for  its  abolition,  if  directed  toward  its  amendment,  could  make 
an  excellent  fiscal  expedient  out  of  it.  But  in  the  field  of 
taxation  there  is  nothing  that  is  absolutely  good.  One  tax  is 
merely  better  than  another  as  one  death  is  easier  than  another. 

1  New  Republic.  22:304.  May  5,   1920. 


162  SELECTED   ARTICLES 

We  are  not  asserting  dogmatically  that  the  excess  profits  tax  is 
better  than  any  other  that  could  be  substituted  for  it.  We 
merely  do  not  know  of  a  better  tax  that  will  make  up  the 
$1,000,000,000  or  more  that  can  be  got  out  of  the  excess  profits 
tax.  If  any  one  will  convince  us  that  there  is  another  tax 
equally  productive,  and  fairer  and  less  onerous  in  its  incidence, 
we  shall  transfer  our  loyalty  at  once. 

Two  proposals  have  of  late  received  wide  attention  and  much 
support  among  business  men.  They  are  for  a  tax  on  retail 
sales  and  for  a  tax  on  gross  sales  of  whatever  character.  The 
tax  on  retail  sales  appears  to  us  politically  impracticable  because 
of  the  high  rate  that  would  be  necessary  to  yield  $1,000,000,000 
of  revenue.  It  is  a  generous  estimate  that  the  aggregate  income 
of  the  American  people  is  $75,000,000,000.  Deduct  from  this,  as 
the  outside  limit  of  spending  power,  all  sums  for  reinvestment, 
all  sums  paid  out  for  rents,  travelling  expenses,  entertainment, 
personal  service,  etc.,  and  the  remainder  can  certainly  not  exceed 
$30,000,000,000  or  $35,000,000,000.  There  must  be  further  deduc- 
tion for  evasions,  and  if  petty  trade  receives  any  exemption — 
apparently  a  political  necessity — the  volume  of  taxable  sales  is 
not  likely  to  exceed  $20,000,000,000  or  $25,000,000,000.  A  5  or 
6  per  cent  tax,  would  be  necessary  to  insure  a  revenue  equivalent 
to  the  loss  that  would  be  entailed  by  the  abolition  of  the  excess 
profits  tax.  Certainly  the  retail  dealer  would  not  stand  this  loss. 
He  would  advance  prices,  in  the  first  instance,  and  he  would 
hardly  content  himself  with  the  precise  measure  of  the  tax.  On 
large  sales  he  might,  but  on  small  ones  he  would  not.  How 
can  a  tobacconist  recoup  himself  for  5^c.  tax  on  a  cigar  except 
by  raising  the  price  ic.  ? 

It  will  be  said  that  the  retailers'  costs  will  be  lowered  since 
the  producers  will  no  longer  have  to  count  excess  profits  taxes 
in  making  up  their  selling  prices.  Thus  there  might  be  an 
offset  to  the  addition  the  retailer  would  have  to  make  to  his 
prices  on  account  of  the  sales  tax.  But  we  have  yet  to  see 
anything  like  proof  that  the  businesses  paying  excess  profits  tax 
would  lower  their  prices  materially  if  relieved  of  the  tax.  They 
might  do  it  if  they  had  no  other  use  for  the  money,  but  as  a 
fact,  they  are  busting  with  projects  for  using  the  money  in  the 
expansion  of  their  business  or  in  new  investments.  Such  uses 
may  be  socially  desirable,  but  they  are  something  quite  different 
from  lower  prices  to  the  consumer.  To  substitute  a  retail  sales 


TAXATION  163 

tax  for  the  excess  profits  tax,  therefore,  seems  to  involve  an 
unavoidable  increase  in  the  cost  of  living.  And  that  is  some- 
thing for  which  no  shrewd  political  leader  will  lightly  assume 
the  responsibility. 

The  gross  sales  tax  presents  the  advantage  of  rates  that  look 
so  low  on  paper  that  it  seems  almost  un-American  to  object 
to  them.  The  Bache  Review,  which  reflects  higher  financial 
opinion  in  its  eager  advocacy  of  this  tax,  estimates  the  aggregate 
turnover  of  American  business  at  $1,500,000,000,000.  That  in- 
cludes many  items,  such  as  speculative  transactions  in  securities 
and  produce,  which  the  Bache  Review  would  never  think  of 
taxing  in  the  same  manner  as  other  sales.  Such  transactions 
obviously  would  not  stand  much  of  a  tax.  But  they  can  hardly 
exceed  $500,000,000,000.  The  remainder  of  $1,000,000,000,000 
may  be  halved,  for  the  sake  of  safety,  and  yet  leave  a  volume 
which  under  a  i  per  cent  tax  would  yield  $5,000,000,000,  almost 
five  times  the  excess  profits  yield.  What  is  the  difficulty  here? 
It  must  be  plain  that  the  consumer's  ultimate  spending  power 
can  expand  into  such  prodigious  turnovers  only  through  the 
fact  that  most  goods  pass  through  many  hands  on  their  way 
to  final  use.  A  i  per  cent  tax  at  each  transfer  would  mean 
a  huge  addition  to  the  final  price  and  a  great  increase  in  the 
cost  of  living.  That  is  not  the  worst  thing  about  a  tax  of  this 
kind.  Businesses  organized  to  carry  the  material  all  the  way 
through  to  the  consumer,  like  some  of  our  great  consolidated 
industrial  concerns,  would  pay  the  tax  only  once.  Businesses 
buying  half  manufactured  goods  for  further  manufacture  would 
pay  the  tax  several  times.  The  tax  would  thus  be  a  crushing 
artificial  burden  on  the  small  concerns.  It  is  hard  to  conceive 
of  a  tax  more  unsound,  economically,  socially  and  politically. 


WHERE  IS  THE  TAX  BURDEN  GOING? ' 

Under  cover  of  a  movement  for  what  is  termed  "tax  revision," 
a  nation-wide  propaganda  is  being  conducted  by  various  "busi- 
ness" organizations  for  the  purpose  of  securing  the  abolition  of 
the  surtax  on  incomes  and  the  excess  profits  tax.  Behind  their 
prattle  about  "oppressive  tax  burdens,"  and  the  need  for  greater 
economy  in  government,  stands  out  one  fact :  the  merchants, 

1  By  Whidden  Graham.  Nation.   113:315.  September  21,  1921. 


164  SELECTED   ARTICLES 

manufacturers,  bankers,  brokers,  and  corporations  want  to  get 
rid  of  taxes  that  they  are  now  paying,  and  are  willing  that  the 
loss  in  revenue  should  be  made  up  by  a  sales  tax  that  will  not 
only  add  the  amount  of  the  tax  to  the  cost  of  living,  but  will 
compel  the  consumer  to  pay  pyramided  taxes  and  profits.  The 
purpose  of  this  accelerated  demand  for  "tax  revision"  is  there- 
fore clear — to  shift  taxes  from  those  best  able  to  pay,  the  small 
but  influential  minority,  and  lay  them  upon  the  general  public. 
Now  all  this  agitation  is  perfectly  legitimate.  If  the  financiers 
and  big  business  men  want  to  get  rid  of  taxes,  they  have  a  right 
to  agitate  for  legislation  lifting  their  burdens.  But  their  prop- 
aganda, based  on  disingenuous  misrepresentations  and  abetted  by 
a  large  section  of  the  press,  should  be  subjected  to  rigid  inspec- 
tion by  the  public  it  is  designed  to  impress. 

The  main  argument  for  repeal  of  the  surtax  on  income  is 
that  this  tax  is  one  of  the  chief  causes  of  "poor  trade,  tight 
money,  diminished  enterprise  and  employment."  As  it  was  stated 
by  a  prominent  advocate  of  repeal  in  a  speech  before  the  Pitts- 
burgh Traffic  Club:  "Capital  has  been  driven  from  the  highways 
of  trade  because  the  Government  lies  in  wait  and  exacts  a  large 
toll,  going  up  to  three-quarters  of  the  wayfarer's  income."  This 
tax,  he  declared,  forces  the  investment  of  capital  in  untaxed 
bonds,  thus  depriving  trade  and  industry  of  capital  urgently 
needed. 

Both  of  these  statements  are  unfounded.  It  is  not  true  that 
our  present  industrial  depression,  with  its  five  million  idle 
workers,  is  due  to  lack  of  capital  caused  by  the  income  tax.  In 
the  first  place,  there  is  no  immediate  need  for  capital  to  build 
more  mills  and  factories.  Our  existing  factories  in  practically 
every  line  of  industry  can  produce  more  goods  in  nine  months 
than  we  can  consume  in  a  year.  With  thousands  of  mills  closed 
or  running  on  half-time,  with  many  of  those  producing  unable 
to  find  markets  for  their  products,  it  is  evident  that  what  the 
country  needs  to  restore  prosperity  is  not  capital  for  new  indus- 
tries, but  increased  purchasing  power  by  the  one  hundred  mil- 
lion consumers.  Present  conditions,  we  are  told,  are  due  to 
overproduction.  This  also,  of  course,  is  not  true.  The  real 
trouble  is  under-consumption,  since  millions  of  men  and  women 
need  more  and  better  food,  clothing,  furniture,  and  all  kinds 
of  goods.  In  any  case,  it  is  clear  that  putting  more  capital  into 
industry  could  not  materially  help,  so  long  as  the  mass  of  con- 
sumers cannot  buy  back  the  value  of  their  labor  product. 


TAXATION  ,    165 

Nor  is  it  true  that  investment  of  money  in  untaxed  bonds 
deprives  trade  and  industry  of  needed  capital.  If  Mr.  A.,  in 
order  to  escape  taxation,  buys  a  $1,000,000  worth  of  untaxed 
bonds  from  Mr.  B.,  the  latter  has  $1,000,000,  which  he  will 
either  loan  or  invest.  The  game  of  avoiding  taxes  by  buying 
bonds  cannot  go  on  indefinitely.  No  matter  how  often  repeated, 
the  process  ends  as  it  began,  with  someone  having  $1,000,000 
to  invest.  There  is  no  less  money  because  of  a  change  in  its 
ownership. 

The  arguments  in  favor  of  repealing  the  excess  profits  tax 
are  equally  unfounded.  It  is  claimed  that  this  tax  is  shifted 
to  the  consumer,  and  so  pyramided,  with  added  profits,  that  it 
adds  23  per  cent  to  the  cost  of  commodities.  No  proof  of  this 
assertion  has  ever  been  furnished,  and  the  fact  that  the  big 
corporations  are  spending  money  to  have  the  tax  repealed  is 
fair  evidence  that  they  have  not  been  able  to  shift  it  to  the 
consumers  of  their  products.  If  it  were  true  that  this  tax  is 
shifted,  why  are  the  corporations  so  anxious  to  get  rid  of  it? 

As  a  substitute  for  the  surtax  on  incomes  and  the  excess 
profits  tax  the  interests  paying  these  taxes  are  urging  the  adop- 
tion of  what  is  termed  a  sales  tax,  or  tax  on  the  manufacture 
and  sale  of  goods.  Various  forms  of  this  tax  are  advocated, 
but  all  agree  that  their  purpose  is  to  lift  the  taxes  from  great 
incomes  and  the  excess  profits  of  corporations.  Against  this 
proposal  to  add  to  the  cost  of  living  by  taxing  commodities  the 
farmers  and  organized  labor  have  vigorously  protested,  and  their 
influence  was  sufficiently  powerful  to  prevent  the  inclusion  of 
any  form  of  a  tax  on  sales  in  the  "tax-revision"  bill  passed  by 
the  House. 

The  advocates  of  the  sales  tax  are  now  concentrating  their 
efforts  on  the  Senate.  It  seems  unquestionable  that  the  surtax 
on  incomes  will  be  drastically  cut — at  least  50  per  cent,  according 
to  the  expressed  views  of  the  majority  of  the  Senate  Finance 
Committee,  of  which  Senator  Penrose  is  chairman.  Senator 
Smoot,  who  holds  ideas  on  tax  revision  materially  at  variance 
with  the  other  members  of  this  committee,  is  nevertheless  also 
in  favor  of  cutting  surtaxes  to  a  32  per  cent  maximum  "so  as 
to  discourage  investments  in  tax-free  securities"  and  a  "3  per 
cent  manufacturer's  sales  tax,"  which  he  describes  as  "to  be 
imposed  only  on  the  manufactured  article  and  therefore  does 
not  pass  to  the  retailers  or  the  jobbers."  How  a  tax  which 
raises  the  price  of  an  article  is  to  be  exorcised  from  being 


i66  SELECTED   ARTICLES 

passed  on  remains  a  mystery.  Secretary  Mellon  has  declared 
in  favor  of  repealing  excess  profits  taxes  and  with  President 
Harding  has  even  been  demanding  a  retroactive  repeal  to  last 
January  i.  Indeed  the  party  in  power  is  committed  body  and 
soul  to  the  relief  of  "business."  For  the  man  in  the  street,  for 
the  average  consumer,  for  the  millions  who,  we  are  often  told, 
"are  America,"  whatever  the  Administration  professes,  it  cares 
and  does  nothing.  If  there  is  one  amendment  to  our  present 
tax  laws  which  ought  to  be  made  retroactive  it  is  surely  the 
raising  of  exemptions  for  men  with  large  families,  or  the  lower- 
ing of  the  percentage  of  tax  charged  on  the  first  thousands  of 
income.  The  Republican  Administration,  however,  starts  from 
the  other  end.  Its  chief  concern  appears  to  be  the  lowering  of 
the  tax  burdens  of  the  wealthy.  And  only  a  determined  stand  by 
the  Senators  from  the  great  agricultural  states,  who  recently 
have  shown  signs  of  intelligent  cooperation,  will  defeat  the 
purposed  shifting  of  the  tax  to  the  consuming  public.  For  there 
is  no  justification  for  the  sales  tax.  It  is  impractical,  costly, 
and  wasteful  in  its  administration,  directly  inhibitive  of  all 
efforts  to  reduce  the  cost  of  living,  and  designed  merely  to  fill 
in  the  deficit  which  will  inevitably  confront  the  Treasury  when 
the  returns  hitherto  paid  into  it  by  corporations  and  individuals 
of  means  are  cut  off. 


DIFFICULTIES  OF  THE  SALES  TAX  1 

The  favorite  remedy  for  all  the  ills  the  taxpayer  is  heir  to 
is  the  sales  tax ;  and  a  number  of  brokers,  investment  bankers 
and  other  business  men  are  conducting  a  systematic  propaganda 
or  "educational  campaign"  to  spread  the  gospel.  One  disciple 
calls  the  tax  on  gross  sales  "An  Ideal  Tax"  and  quotes  with 
approval  an  enthusiastic  convert  who  says  that  "the  gross  sales 
tax  idea  is  as  simple  as  A  B  C."  According  to  members  of 
the  Committee  on  Ways  and  Means  who  recently  drafted  a 
sales  tax,  the  reports  about  its  simplicity  are  grossly  exaggerated. 

The  sales  tax  has  had  a  rather  dark  record  in  the  history 
of  taxation.  Adam  Smith  regarded  the  alcavala,  a  Spanish 
tax  on  sales,  as  the  cause  of  the  ruin  of  the  agriculture  and 

1  By  Thomas  S.  Adams.  Needed  tax  reform  in  the  United  States. 
p.  14-16. 


TAXATION  167 

manufacture  of  Spain.  The  conglomerate  group  of  sales  taxes 
which  we  employed  during  the  Civil  War  did  not  on  the  whole 
work  satisfactorily.  However,  it  is  fair  to  infer  that  the  failure 
of  these  taxes  was  due  very  largely  to  the  heavy  rates  at  which 
they  were  imposed;  and  the  I  per  cent  sales  tax  now  imposed 
in  the  Philippine  Islands  is  said  by  competent  authorities  to  be 
a  successful  and  satisfactory  tax. 

A  very  great  deal  may  fairly  be  said  in  favor  of  this  pro- 
posal. The  sales  tax  would  perhaps  possess  the  three  greatest 
practical  virtues  which  a  tax  can  have;  it  would  carry  a  very 
low  rate;  it  would  be  highly  productive,  and  the  taxpayer  would 
know  with  certainty  the  amount  which  he  was  expected  to  pay. 
If  shifted  to  the  consumer,  as  it  is  usually  but  not  always  pre- 
dicted by  its  advocates,  it  would  be  paid  piecemeal  in  small 
amounts  as  purchases  were  made.  It  would  reduce  the  excessive 
dependence  of  the  Treasury  upon  various  forms  of  income 
taxation.  These  are  great  virtues  and  the  low  rate  itself  may 
fairly  be  said  to  counterbalance  many  of  the  weaknesses  to  which 
the  sales  tax,  in  common  with  all  other  taxes,  is  subject. 

Three  General  Forms 

Three  general  forms  of  this  tax  may  be  distinguished.  The 
most  inclusive — the  general  turnover  tax — has,  I  believe,  no  real 
chance  of  adoption.  Its  yield  at  I  per  cent  would  be  enormous, 
if  not  the  $5,000,000,000  which  have  been  claimed  for  it,  cer- 
tainly over  $2,000,000,000  a  year  at  I  per  cent.  But  it  can  hardly 
be  conceived  that  Congress  would  consent  to  apply  a  tax  of  I 
per  cent  or  even  ^  of  I  per  cent  to  every  kind  of  sales — sales 
of  farms  and  city  homes;  of  the  plant,  business  and  assets  of 
huge  corporations ;  and  of  all  other  capital  assets.  It  is  really 
funny  how  each  class  believes  that  every  other  sort  of  business 
can  bear  such  a  tax.  This  is  well  brought  out  in  the  publication 
that  calls  the  sales  tax  an  "ideal  tax."  This  proposes  to 
apply  the  tax  to  all  other  turnovers  except  those  "on  the 
various  exchanges — grain,  cotton,  stock,  the  sale  of  secur- 
ities, municipal,  corporation  and  others."  This  exception 
is  made  by  a  brokerage  concern.  There  are,  of  course,  many 
reasons  for  exempting  sales  on  exchanges,  but  there  are  equally 
good  reasons  for  exempting  many  other  sales. 

If  sales  of  capital  assets  are  eliminated,  we  reach  the  second 


i68  SELECTED   ARTICLES 

form,  a  compromise  between  the  general  turnover  tax  and  a  tax 
on  retail  sales.  Such  a  tax  would  yield  from  $700,000,000  to 
$1,000,000,000  a  year  at  a  rate  of  I  per  cent,  according  to  the 
exemptions  authorized.  It  would  apply  particularly  to  the  sale 
of  goods,  wares  and  commodities  whether  for  resale  or  not.  It 
would  thus  have  the  cumulative  or  pyramiding  effect  frequently 
ascribed  to  all  taxes  on  business.  If  there  are  on  an  average 
six  turnovers  between  first  production  and  final  sale  to  the 
consumer,  the  I  per  cent  tax  would  be  imposed  at  increasing 
amounts  six  times.  The  tax  would  bear  lightly  on  combinations 
or  "trusts"  which  conduct  under  one  ownership  several  of  the 
operations  usually  carried  on  by  independent  business  concerns. 
The  combined  business  could  undersell  a  group  of  independent 
concerns.  The  manufacturer  who  did  his  own  jobbing  would 
have  a  real  advantage  over  his  competitors  who  did  not.  The 
last  characteristic  is,  in  the  words  of  one  enthusiastic  champion, 
"another  virtue  of  the  gross  sales  tax,"  and  this  advocate  goes 
on  to  say  that  "a  flat  rate  of  tax  on  each  commodity  handled 
would,  in  the  case  of  staples,  eliminate  a  lot  of  rehandling  and 
reselling  of  commodities." 

Tax  on  Final  Sales 

The  retail  tax,  or  tax  on  final  sales,  would  yield  probably, 
at  a  rate  of  i  per  cent,  from  $350,000,000  to  $450,000,000  a  year, 
depending  upon  the  exemptions.  It  would  not  apply  to  sales  of 
capital  assets,  the  pyramiding  effect  would  be  absent,  and  it 
would  not  foster  combination.  But  it  presents  grave  difficulties. 
The  scheme  depends  for  its  success  upon  its  generality  and  low 
rate.  Bread,  clothes,  medicine  and  most  necessities,  when  sold, 
are  to  be  taxed.  The  tax  rate  is  small  and  Congress  is  to  be 
saved  from  the  invidious  task  of  selecting  particular  objects  or 
classes  for  special  taxation.  This  is  the  theory— but  it  almost 
certainly  would  not  work  out  in  practice. 

First  of  all,  Congress  would  be  practically  forced  to  exempt 
newsboys,  and  other  very  small  dealers.  The  sales  tax  recently 
formulated  by  the  Committee  on  Ways  and  Means  exempted 
gross  sales  of  less  than  $500  a  month  and  later  sales  than  $1,000 
a  month.  Then  we  have  the  question  of  services.  Should  we 
tax  the  sale  of  bread  and  not  the  sale  of  the  services  of  the 
actor  or  the  lawyer?  What  about  the  sale  of  water  or  the 


TAXATION  169 

services  of  public  utilities  such  as  transportation?  Could  the 
street  railway  shift  a  tax  of  i  per  cent,  and  if  it  could  not  is  the 
average  street  railway  company  able  to  bear  the  tax  itself? 
What  of  the  farmer?  His  sales  are  exempt  from  the  tax 
imposed  in  the  Philippine  Islands,  and  they  were  exempted  in 
the  bill  drafted  by  the  Committee  on  Ways  and  Means.  But 
why? 

Limiting  the  tax  to  final  sales  would  create  a  difficult  admin- 
istrative problem.  Merchants  and  other  dealers  would  be  required 
to  secure  affidavits  from  purchasers  stating  whether  the  goods 
were  to  be  consumed  or  to  be  resold,  either  as  bought  or  in 
some  changed  form.  Would  purchasers  tell  the  truth?  How 
about  purchases  of  gasolene,  coal  and  similar  commodities  or 
services  which  can  be  used  either  in  business  or  for  final  con- 
sumption ? 

Certificates  of  this  kind,  distinguishing  purchases  for  resale 
from  purchases  for  consumption  and  use,  are  now  employed  in 
connection  with  some  of  the  existing  sales  taxes ;  but  they  are 
said  to  lead  to  considerable  evasion.  It  is  an  even  question 
whether  such  a  device  could  be  successfully  administered.  In 
any  event,  the  sales  tax,  like  the  income  tax,  would  depend 
almost  wholly  on  the  honesty  of  the  taxpayer  for  its  successful 
collection.  Experience  with  the  income  tax  indicates  that  the 
honesty  of  the  taxpayer,  particularly  in  case  of  the  larger  busi- 
ness concerns,  is  capable  of  withstanding  the  strain,  provided  an 
administrative  force  large  enough  to  check  and  supervise  the 
returns  is  employed.  The  administrative  problem  would  be  a 
huge  one,  with  almost  every  business  concern  in  the  country 
which  sells  at  retail  subject  to  the  tax.  This  administrative 
burden  could  not  be  successfully  carried,  in  the  writer's  opinion, 
unless  the  tax  were  used  to  replace  some  existing  tax  which,  like 
the  excess  profits  tax,  imposes  a  heavy  administrative  burden. 
Few  things  could  be  worse  than  adoption  of  such  a  tax  followed 
by  wholesale  evasion. 

Consumer  Would  Pay 

Just  who  would  pay  this  tax?  The  general  assumption  is 
that  the  consumer  would  pay  it,  but  the  champions  of  the  tax 
are  at  curious  variance  on  this  point.  One  advocate  says  on 
this  point:  "As  to  the  very  natural  dislike  which  a  retailer  has 


i;o  SELECTED   ARTICLES 

for  collecting  a  tax  from  his  customer,  that  can  be  avoided  by 
levying  the  tax  against  the  merchant's  net  sales  as  they  appear 
upon  his  books,  leaving  it  optional  with  him  whether  he  absorbs 
it  himself  or  treats  it  as  an  item  of  expense  to  be  passed  along." 
Another  equally  zealous  champion  says  in  one  paragraph  that 
the  tax  would  be  "absorbed  by  the  seller"  and  in  the  very  next 
paragraph  "that  it  would  be  equally  paid  by  everybody  in  the 
country." 

In  the  long  run  it  is  rather  certain  that  such  a  tax  would  be 
borne  by  the  consumer.  But  at  present,  with  public  opinion  so 
inflamed  about  the  high  cost  of  living,  and  with  a  probable  fall 
in  prices  imminent,  it  is  probable  that  the  tax  in  many  instances 
would  be  borne  by  the  dealer.  It  would  to  this  extent  become 
a  business  tax  imposed  without  reference  to  ability  to  pay,  but 
simply  in  accordance  with  gross  sales  whether  there  was  any 
net  profit  or  not.  There  is  little  or  nothing  to  be  said  for  a 
business  tax  levied  simply  in  accordance  with  sales.  And  if  the 
tax  were  passed  on  to  consumers  in  the  present  state  of  public 
opinion,  I  have  no  doubt  that  in  many  instances  it  would 
strengthen  the  demands  of  wage  earners  for  higher  pay,  act  as 
an  incitement  to  strikes,  and  in  this  way  be  passed  along  to  the 
employers  involved.  While  the  cost  of  living  remains  so  high, 
the  sales  tax  is  probably  a  political  impossibility,  as  its  recent 
treatment  in  the  House  of  Representatives  suggests. 

Sober-headed  business  men  are  sometimes  intoxicated  by  a 
sudden  vision  of  Utopia.  This  intoxication,  as  financial  history 
amply  proves,  frequently  leads  to  the  championship  of  some 
"single  tax."  The  legislative  authority  is  to  be  spared  all  trouble 
by  the  blanket  levy  of  a  tax  that  is  "as  simple  as  A  B  C."  But 
Congress  could  not  work  for  one  day  on  the  sales  tax  without 
being  forced  to  discriminate,  to  exempt  certain  classes  and 
change  the  rate  as  applied  to  others.  If  we  must  discriminate, 
why  not  carry  the  tax  to  its  logical  outcome — a  tax  on  articles 
of  consumption  other  than  necessities,  levied  preferably  on  a 
few  large  industries  which  deal  in  non-essentials  of  wide-spread 
consumption,  in  order  that  the  tax  may  be  effectively  and  cheaply 
administered.  The  people  revolt  at  the  suggestion  of  a  general 
tax  on  necessities.  The  administrator  revolts  at  the  idea  of 
another  general  tax,  applicable  to  hundreds  of  thousands  of 
business  concerns,  which  could  be  adequately  supervised  only 
with  a  small  army  of  Federal  employees. 


TAXATION  171 


A  WAR  SALES  TAX  DURING  PEACE  1 

The  proposition  I  desire  to  discuss  is  one  which  proposes 
to  repeal  the  present  tax  producing  about  $800,000,000  annually 
under  the  excess  profits  tax,  and  imposing  in  lieu  thereof  a  tax 
of  $1,000,000,000  by  what  is  known  as  a  sales  tax  or  a  turnover 
sales  tax.  Every  man  in  this  House  should  be  informed  on  that 
subject  before  he  votes. 

I  will  say  this  briefly,  that  there  have  been  several  men 
before  the  Ways  and  Means  Committee,  intelligent  men,  very 
able  men,  advocating  the  enactment  of  a  general  turnover  sales 
tax,  which,  as  you  know,  is  imposed  in  Germany  and  in  the 
Philippine  Islands  and  in  Mexico,  the  only  three  countries  that 
impose  it  effectually.  There  they  tax  the  sugar  and  tea,  and 
everything  that  they  eat  and  drink,  on  every  turnover  that  may 
be  had.  The  ablest  body  of  men  that  has  met  in  this  country  to 
consider  this  subject,  known  as  the  National  Industrial  Confer- 
ence Board,  has  brought  in  a  report  showing  how  objectionable 
that  system  would  be  for  this  country.  The  United  States 
Chamber  of  Commerce,  through  its  tax  board,  acting  intelli- 
gently and  weighing  all  the  arguments,  has  brought  in  prac- 
tically a  similar  report. 

Our  Government  is  facing  an  annual  tax  burden  five  times 
the  size  of  its  pre-war  expenditures.  During  the  recent  war 
large  receipts  were  had  from  excess  profits  taxes  on  corporations 
and  on  personal  income  taxes  due  largely  to  the  surtax.  Congress 
now  is  facing  a  well-organized  propaganda,  based  on  assumed 
economic  arguments  for  the  repeal  of  the  excess  profits  tax  and 
for  a  reduction  on  income  surtaxes.  Another  extensive,  well- 
organized  propaganda  exists  which  demands  the  passage  of  a 
turnover  consumption  tax  law  with  a  sweeping  tax  on  all  neces- 
saries of  life,  which  bill  is  pressed  for  passage  by  Otto  Kahn, 
Jules  Bache,  Meyer  Rothschild,  and  others  who  have  appeared 
before  the  Ways  and  Means  Committee  urging  a  turnover  sales 
tax.  Practically  no  opposition  arguments  have  been  presented 
to  the  committee. 

Only  limited  study  has  been  or  can  be  given  this  vastly  im- 
portant subject  by  the  average  Representative  in  Congress,  and 

1  From  speech  of  Honorable  James  A.  Frear  in  the  House  of  Repre- 
sentatives. January  31,  1921. 


172  SELECTED   ARTICLES 

I  am  not  assuming  to  speak  against  a  sales  tax  from  the  stand- 
point of  a  tax  student  or  tax  authority,  but  from  the  viewpoint 
of  a  layman  and  legislator  whose  responsibilities  are  equally 
due  to  the  banker,  broker,  and  bricklayer,  the  capitalist  and 
cobbler,  the  financier  and  farmer,  the  manufacturer  and  ma- 
chinist, the  teacher  and  day  laborer,  all  of  whom  to  a  greater 
or  less  degree  will  help  pay  the  $5,000,000,000  annual  tax  here- 
after to  be  collected. 

I  desire  to  place  before  you  the  views  of  recognized  tax  stud- 
ents and  authorities  and  shall  introduce  my  own  observations  only 
briefly  and  for  the  purpose  of  calling  attention  to  matters  that 
have  seemed  to  me  worthy  of  consideration;  but  first  as  to  the 
problems  before  us. 

From  the  report  of  the  Secretary  of  the  Treasury  I  quote 
figures  that  briefly  set  forth  the  situation  confronting  Congress : 

The  gross  public  debt  on  Oct.   31,   1920,  was $24,062,509,672 

Short-term    debt   in   certificates    of   indebtedness    Dec.    i . . . .     2,767,000,000 

War  savings  securities  maturing  January,    1923 800,000,000 

Victory   notes   due   May,    1923    4,237,000,000 

In  round  numbers  we  must  provide  for  $7,500,000,000  by  May, 
1923.  Whether  by  refunding  or  payment  is  a  matter  of  policy 
to  be  determined.  It  is  estimated  that  $1,250,000,000  must  be 
raised  by  tax  and  set  apart  annually  for  interest  and  sinking 
fund. 

Of  expenditures  by  the  Government  for  the  fiscal  year  1920, 
reaching  $6,403,000,000,  the  following  items  composing  90  per 
cent  are  significant: 

SECRETARY  OF  TREASURY  REPORT,   1920,  p.  48 

Purchase  of  obligations  of  foreign  Government $421,000,000 

War    Department    1,61 1,000,000 

Navy    Department    736,000,000 

Shipping  Board  531,000,000 

Railroads     1,037,000,000 

Interest  on  public  debt   1,020,000,000 

Pensions    21 3,000,000 

War-risk  Insurance    1 1 7,000,000 

Purchase  Federal  farm-loan  bonds    30,000,000 


$5,716,000,000 

During  the  second  session  of  the  sixty-sixth  Congress  total 
appropriations  and  authorizations  reached  $5,874,438,788. 

An  offset  of  an  uncertain  amount  may  be  considered  in  war 
loans  due  this  Government  from  various  European  Governments 
under  the  several  acts  of  Congress  beginning  April  24,  1917, 
and  ending  July  9,  1918,  for  a  total  authorization  of 


TAXATION  173 

$10,000,000,000.  Credits  to  an  amount  of  $9,710,525,310  have 
been  given  and  cash  advanced  by  our  Government  of 
$9,580,823,677- 

All  interest  payments  on  the  above  have  been  extended  since 
the  war  at  the  request  of  the  different  Governments  that  are 
seeking  to  become  rehabilitated.  Another  uncertain  element  of 
lower  tax  levy  comes  from  a  reduction  in  running  expenses  of 
the  Government  due  to  greater  economy.  We  have  then  to  con- 
sider probably  appropriations  by  Congress  based  on  the  1920 
record  of  between  $3,000,000,000  and  $4,000,000,000  and  payment 
of  so  much  of  the  floating  debt  as  can  be  cared  for  in  addition 
to  an  annual  interest  and  sinking  fund  charge  of  $1,250,000,000 
as  stated.  That  is  our  problem. 

In  the  Secretary  of  the  Treasury's  Report,  1920  (p.  779),  ap- 
pears receipts  for  1920  fiscal  year  as  follows: 

Customs,  $323,536,559;  income  and  excess  profits,  $3,957,701,342;  mis- 
cellaneous internal  revenue,  $1,441,447,870;  other  miscellaneous  items  and 
sales  of  public  lands  making  total  receipts  for  1920  of  $6,695,374,766. 

It  is  conceded  that  these  receipts  will  materially  fall  off  in 
the  future  because  of  reduced  excess  profits  and  smaller  in- 
dividual incomes.  In  a  letter  from  the  Commissioner  of  In- 
ternal Revenue  dated  November  20,  1920,  he  says  the  actuary 
estimated  Treasury  receipts  as  follows: 
1919: 

Individual   taxes    $901,000,000 

Corporation    taxes    400,000,000 

War    and    excess    profits    1,300,000,000 


$2,601,000,000 

1920 : 

Individual  taxes   1,400,000,000 

Corporation  taxes   650,000,000 

War  and  excess  profits    1,700,000,000 


$3,7So,ooo,ooo 

It  is  now  proposed  in  some  quarters  to  repeal  the  excess 
profits  tax  and  reduce  the  surtaxes  on  individual  incomes  so 
that  a  large  part  of  the  above  income  will  be  lost.  Even  the 
Secretary  of  the  Treasury  advises  a  repeal  of  the  excess  profits 
tax,  although  he  asks  that  it  be  replaced  by  some  other  form  of 
corporation  tax. 

Constant  assaults  on  the  excess  profits  tax  law  from  all  direc- 
tions indicate  it  is  a  friendless  waif,  not  popular  with  those 
whose  profits  it  has  heretofore  divided  for  the  support  of 


174  SELECTED   ARTICLES 

Government  and  it  also  seems  probable,  judging  from  opposition 
expressed  against  any  new  form  of  tax  that  no  substitute  will 
meet  with  general  approval.  One  tax  is  insistently  urged  upon 
Congress  in  case  the  excess  profits  tax  law  is  repealed.  It  is 
known  as  a  consumption  turnover  sales  tax  and  was  vigorously 
pressed  on  the  Ways  and  Means  Committee  last  session  in  an 
effort  to  make  it  part  of  the  revenue  plan  that  was  to  provide 
for  financing  the  soldiers'  bonus  bill,  which  bill  finally  passed 
the  House. 

What  Is  a  Turnover  Consumption  Tax? 

It  is  a  reminder  of  the  small  boy's  description  of  a  toothache, 
'an  abomination  in  the  eyes  of  the  Lord  that  does  no  man  good." 
However,  a  consumption  turnover  tax  will  do  everybody — good 
and  plenty.  It  is  a  tax  levied  on  every  pound  of  sugar,  salt,  and 
starch  that  goes  into  family  use  from  the  growing  of  the  sugar 
beets  to  its  purchase  at  the  store,  on  every  pound  of  flour  and 
other  food,  on  every  pound  of  meat  from  the  farm  to  the  packer 
and  back  again,  on  every  pound  of  tea  or  coal,  on  every  gar- 
ment from  the  hat  down  to  shoes  and  stockings,  or,  like  an 
old-time  description  of  a  tariff  bill,  it  is  a  tax  from  the  cradle 
to  the  coffin.  Every  sale  of  wood  from  the  owner  to  the  logger, 
to  the  mill  man,  to  the  cradle  or  coffin  factory,  to  the  wholesaler, 
to  the  retailer,  and  finally  to  the  customer  pays  the  tax  on  every 
turnover  with  several  times  added  for  good  measure,  until  the 
actual  cost  and  actual  tax  join  in  a  free-for-all  price  raising  for 
the  one  hundred  five  million  consumers  who  will  pay  an  equal 
share  of  the  increase.  The  wealthiest  and  poorest  will  pay  the 
same  tax,  because  a  turnover  sales  tax  plays  no  favorites  from 
Vanderbilt  to  the  humblest  beggar  when  both  must  eat  or  starve. 

During  1918,  one  person  in  this  country  paid  on  an  annual 
income  of  over  $5,000,000,  two  on  between  $4,000,000  and 
$5,000,000,  eleven  on  between  $2,000,000  and  $3,000,000,  forty-nine 
on  between  $1,000,000  and  $2,000,000,  and  one  hundred  seventy- 
nine  others  on  incomes  between  $500,000  and  $1,000,000.  Under  a 
turnover  tax  these  people  would  turn  over  the  same  amount 
of  tax  for  the  same  food,  drink,  and  wear  as  the  poorest  in  the 
land.  Fraud  in  omitting  to  report  sales,  which  will  be  general, 
would  penalize  only  the  consumer.  Administration  by  the 
Government  would  become  a  hopeless  task,  judging  from  past 
experience  when  every  seller  levies  the  tax  with  a  generous 
margin  on  the  goods  sold  whether  the  tax  is  reported  or  not. 


TAXATION  175 

It  is  neither  a  just,  equitable,  nor  enforceable  tax,  and  I  desire 
to  present  proof  of  these  charges  against  the  criminal  at  the 
bar — a  turnover  consumption  tax. 

Report  of  the  Special  Committee  on  Taxation  of  the  Chamber 
of  Commerce  of  the  United  States 

It  would  seem  that  no  careful  legislator  will  be  deluded  by 
the  arguments  of  a  handful  of  financially  interested  advocates 
of  a  turnover  sales  tax,  and  the  objections  already  presented 
are  unanswerable;  but  another  organization,  the  Chamber  of 
Commerce  of  the  United  States,  has  aimed  to  give  the  same 
service  to  Congress  on  the  same  vitally  important  tax  problem, 
and  through  its  committee  of  nine  tax  authorities  has  also  an- 
nounced its  findings  on  a  turnover  sales  tax.  The  report  of  its 
committee  against  this  tax  is  unanimous.  I  quote  at  some 
length  because  of  the  recognized  high  standing  of  this  country- 
wide commercial  organization : 

A   CONSUMPTION  TAX — DIFFICULTY  OF  ADMINISTRATION 

Various  arguments  have  been  brought  forward  in  support  of  a  sales 
tax,  but  in  the  opinion  of  the  committee  these  arguments  are  overcome 
by  important  objections  to  any  attempt  to  use  such  a  source  for  Federal 
revenues.  In  the  first  place,  the  application  of  any  of  these  taxes  and 
its  successful  administration  would  not  be  so  simple  as  is  often  sup- 
posed. In  declining  markets  and  under  conditions  of  close  competition 
turnover  taxes  would  frequently  have  to  be  borne  by  the  seller,  and  in 
many  instances  might  for  him  be  an  added  cause  of  loss.  Even  if 
passed  on  through  addition  to  the  price  paid  by  the  buyer,  it  would 
almost  inevitably  be  pyramided,  causing  material  increases  in  many  prices 
paid  by  consumers. 

RUINOUS   EFFECT  OF    PRICE  PYRAMIDING 

There  are  still  more  fundamental  considerations  weighing  against  such 
a  tax.  One  of  the  objections  to  the  excess  profits  tax  would  apply  with 
added  force;  this  is  uncertainty  in  yield  of  revenue,  for  gross  sales 
fluctuate  more  widely  than  net  income.  If  any  form  of  turnover  tax  were 
imposed,  it  would  result  in  advantages  for  large  industrial  undertakings 
which  begin  their  processes  with  raw  materials  and  carrv  them  through 
to  the  finished  product;  such  "integrated"  industries  would  be  subject  to 
the  tax  but  once,  whereas  their  smaller  competitors,  acquiring  materials 
from  independent  sources,  would  have  the  tax  in  their  prices  several 
times  and  probably  increased  in  effect  through  pyramiding.  Finished 
articles  imported  from  abroad  would  have  a  similar  advantage  over  domes- 
tic manufactures. 

REPUDIATES  PRINCIPLE  OF  TAXING  ACCORDING  TO  ABILITY  TO  PAY 

Perhaps  the  greatest  inequity,  however,  would  appear  in  the  propor- 
tionate results  of  any  of  the  taxes  here  under  consideration  upon  the 
person  with  small  income  as  compared  with  the  person  of  large  income. 
At  the  bottom  of  the  economic  scale  are  persons  whose  income  barely 
suffices  to  provide  them  with  necessities  of  the  poorest  quality  and  in 
the  smallest  amount,  and  at  the  other  end  of  the  scale  are  persons  whose 
expenditures  for  necessities,  no  matter  how  large,  represent  but  a  fraction 
of  their  income.  Any  tax  falling  upon  general  expenditures  is  conse- 


i;6  SELECTED   ARTICLES 

quently  disproportionately  heavier  for  persons  of  smaller  incomes  as  com- 
pared with  persons  of  larger  incomes.  To  the  extent  sales  taxes  of  the 
sorts  that  have  been  suggested  were  used  as  a  general  source  of  revenue 
there  would  be  a  departure  from  the  principle  that  taxes  should  be  levied 
in  accordance  with  ability  to  pay. 

OF  DOUBTFUL  LEGALITY 

Finally,  there  would  seem  to  be  legal  difficulties  in  the  way  of  a 
general  sales  tax.  Opinions  handed  down  by  the  Supreme  Court  in 
March  and  June  of  this  year  make  it  clear  that  such  a  tax  is  not  au- 
thorized by  the  income-tax  amendment  to  the  Constitution.  Whether  or 
not  it  would  be  held  by  the  courts  to  be  an  indirect  tax  is  uncertain;  if 
it  were  held  to  be  a  direct  tax,  it  would  under  the  Constitution,  have 
to  be  apportioned  among  the  States  in  accordance  with  their  population, 
an  obviously  impracticable  procedure.  Reliance  for  revenues  in  large 
amount  should  not  in  any  event  be  placed  upon  a  tax  regarding  the 
legality  of  which  there  is  doubt. 

It  must  be  kept  in  mind  that  these  business  interests  are 
acting  for  their  own  protection  because  of  the  uncertain  char- 
.acter  of  a  turnover  consumption  tax.  When  it  does  not  shift 
it  threatens  the  industry  compelled  to  pay  it  and  when  it  shifts 
to  the  consumer,  he  is  unjustly  compelled  to  pay  a  tax  now  paid 
out  of  corporations'  excess  profits. 

The  authorities  quoted  will  carry  weight  to  most  minds  of 
the  absolute  danger  attending  a  turnover  consumption  tax. 

Experts  Who  Can  Best  Testify 

Another  list  of  authorities  can  be  quoted  whose  names  are 
legion.  They  consist  of  the  farmers,  clerks,  skilled  and  common 
labor,  housewives,  and  others  not  enumerated,  who  are  glad  to 
earn  enough  to  get  food  and  clothes  and  to  give  their  children 
a  common  school  education.  They  are  the  ones  who  will  be 
called  upon  to  pay  90  per  cent  and  over  of  the  proposed  con- 
sumption taxes  now  paid  by  corporation  excess  profits  and  high 
supertaxes  on  personal  incomes. 

Any  advocate  of  average  intelligence,  can  safely  take  his  case 
to  this  class  of  experts,  and  secure  a  verdict  against  a  turn- 
over consumption  tax  nine  times  out  of  ten,  either  in  a  judicial, 
legislative,  or  political  forum,  and  the  tax  if  passed,  will  be 
tried  out,  without  doubt,  by  the  last-named  court  and  the  one 
of  last  resort — the  people  at  the  first  opportunity  given  to 
register  their  disapproval  at  the  polls. 

Whom  Does  Congress  Consult  in  Revenue  Legislation? 

Presumably  no  more  reliable  adviser  for  Congress  on  reve- 
nues exists  than  the  Secretary  of  the  Treasury  whose  duty  it  is 
to  properly  and  economically  collect  revenues  and  carry  on  the 
fiscal  policy  of  the  Government.  He  has  for  his  advisers  Gov- 


TAXATION  177 

ernment  tax  experts  and  men  of  nation-wide  reputation  without 
private  or  personal  ends  to  protect  or  advance.  He  is  con- 
cerned in  both  revenue  to  be  obtained  and  method  of  adminis- 
tration. In  his  1920  annual  report  Secretary  Houston  condemns 
a  proposed  sales  tax,  as  follows  (p.  28)  : 

In  the  Treasurer's  opinion  there  are  many  grave  objections  to  a  sales 
tax.  Further  consideration  of  the  subject  has  convinced  me  that  a  gen- 
eral sales  or  turnover  tax  is  altogether  inexpedient.  It  would  apply 
not  only  to  the  necessities  of  life — the  food  and  clothing  of  the  very 
poor — but  it  would  similarly  raise  the  prices  of  the  materials  and  equip- 
ment used  in  agriculture  and  manufactures.  It  would  confer  in  effect, 
a  substantial  bounty  upon  large  corporate  combinations  and  place  at  cor- 
responding disadvantage  the  smaller  or  disassociated  industries  which  carry 
on  separately  the  business  operations  that  in  many  combinations  and  trusts 
are  united  under  one  ownership.  The  group  of  independent  producers 
would  pay  several  taxes,  the  combinations  would  pay  only  one  tax.  Finally, 
it  would  add  a  heavy  administrative  load  to  the  Bureau  of  Internal  Rev- 
enue which  ...  is  already  near  the  limit  of  its  capacity.  Simplication 
of  the  tax  laws  and  restriction  rather  than  extension  of  its  scope  are  as 
important  from  the  standpoint  of  successful  administration  as  from  that 
of  the  taxpayers'  interests. 

Administration  of  a  General  Sales  Tax 

Mr.  Adams,  a  Treasury  income  tax  expert,  says  on  this  point 
in  the  Ways  and  Means  Committee  hearings: 

If  you  have  the  income  tax  with  all  the  necessary  difficulties  and  you 
have  the  corporation  tax  with  all  its  necessary  difficulties  and  you  have 
the  principal  present  consumption  taxes  it  is  going  to  be  a  dangerous 
thing  from  an  administrative  standpoint  to  add  a  general  sales  tax  which 
will  bring  in  possibly  a  million  new  taxpayers  to  take  care  of,  together 
with  all  the  added  complications  of  a  new  and  nation-wide  tax.  .  .  (p.  28.) 

His  replies  to  questions  of  administration  are  illuminating: 

Mr.  FREAR.  How  many  employees  does  the  Treasury  Department  have 
engaged  in  this  particular  work  (collecting  taxes)  ? 

Dr.  ADAMS.  I  shall  have  to  ask  you  to  let  me  put  that  figure  in  the 
record  (these  figures,  p.  36,  show  18,440  employees). 

Mr.  FREAR.  What  would  be  the  number  of  employees  required  in  ad- 
dition to  cover  the  final  sales  tax  in  checking  up? 

DR.  ADAMS.  That  depends  entirely  upon  the  accuracy  with  which  these 
reports  were  checked.  You  can  simply  put  a  sales  tax  on  the  statute 
books  and  leave  it  to  enforce  itself  and  it  doesn't  require  very  much 
force  to  handle  it. 

Mr.  FREAR.  But  you  spoke  yesterday  of  the  different  forms  and  that 
is  my  reason  for  going  back  to  it. 

Dr.  ADAMS.  And  that  ought  not  to  be  done.  We  are  experiencing  a 
perfectly  enormous  amount  of  evasion  with  respect  to  some  sales  taxes, 
such  as  are  imposed  by  section  630,  the  soda  fountain  drinks  and  taxes 
of  that  kind,  because  we  haven't  got  an  adequate  force  to  check  them 
up  and  supervise  them. 

A  ioo  Per  Cent  Increased  Price  for  Soft  Drinks 

It  is  certain  that  a  I  per  cent  turnover  sales  tax  would  be 
pyramided  so  that  in  a  half  dozen  or  ten  turnovers  the  padded 
price  in  each  turnover  sale  would  make  a  ballooning  of  prices  as 
wild  in  character  and  as  burdensome  in  effect  as  were  war-time 
prices.  Two  or  three  illustrations  are  readily  available. 


i;8  SELECTED   ARTICLES 

During  a  hearing  before  the  Ways  and  Means  Committee  De- 
cember 21,  Senator  Hardwick,  now  governor  of  Georgia,  was  dis- 
cussing the  effect  of  a  luxury  tax  on  soft  drinks  when  the  follow- 
ing facts  were  developed: 

MR.  HARDWICK.  Bottled  goods  that  have  a  standard  and  uniform  price 
throughout  the  country  of  sc.  were  immediately  increased  to  the  consumer 
(after  levying  of  a  i  per  cent  luxury  tax  or  %c.  tax  on  sc.  sale)  until 
the  article  that  formerly  sold  at  sc.  cost  the  consumer  7  to  IDC.  .  . 

MR.  FREAR.  Wouldn't  that  apply,  Senator,  to  the  sales  tax  ordinarily; 
that  is,  without  relation  to  the  exact  tax  which  the  seller  will  be  obliged 
to  pay?  He  will  place  upon  goods  a  price  that  will  make  even  change. 

Mr.  HARDWICK.  I  have  no  doubt  in  my  own  mind,  speaking  person- 
ally, that  that  is  true,  and  I  understand  that  the  gentleman  who  pre- 
sented the  matter  to  your  committee  yesterday  admitted  that  when  that 
is  passed  on,  ultimately,  it  always  gains  a  little,  like  the  snowball  going 
downhill  in  wintertime.  .  .  (p.  135.) 

MR.  FREAR.    You  say  that  these  soft  drinks  were  formerly  sold  for  sc.? 

Mr.  HARDWICK.     Yes,   sir. 

Mr.  FREAR.     Then    what   tax   was    added   by   Congress? 

MR.   HARDWICK.     10   per  cent. 

MR.  FREAR.     Then  the   same  soft  drinks  were  sold  for   ioc.? 

Mr.  HARDWICK.     They  were  sold   at  from   6   and   7  to   ioc. 

Mr.  FREAR.  In  that  case  they  added  ten  times  the  tax,  did  they  not, 
if  sold  for  ioc.? 

Mr.  HARDWICK.     Undoubtedly. 

This  increase  of  100  per  cent  in  price  or  950  per  cent  tax 
increase  is  submitted  as  a  fair  example  of  the  workings  of  a 
sales  tax,  with  increased  price  added  for  every  turnover. 

How  It  Works  Now  With  Cigars,  400  Per  Cent  Tax  Increase 

Equally  to  the  point  and  almost  as  greatly  padded  is  the  pro- 
posed price  of  a  cigar  from  8c.  to  gc.,  because  of  a  suggested 
increase  in  duty  of  $2  a  thousand,  or  y$  of  ic.  for  each  cigar. 
The  following  from  the  hearings  of  January  21  before  the  Ways 
and  Means  Committee  illustrates  the  same  evil : 

Mr.  LONGWORTH.  How  much  would  you  add  to  cover  that  1/5  of  ic. 
($2  a  thousand  additional  duty)  ? 

MR.  KRAUSS.  We  have  no  medium  of  exchange  for  selling  goods  at 
fifths  of  cents. 

MR.  LONGWORTH.  How  much  would  it  add  per  cigar?  As  a  matter  of 
fact,  you  would  add  2c.,  would  you  not,  or  would  you  add  ic.?  How 
much  would  that  add  to  the  retail  price?  It  would  probably  add  ic.  so 
that  there  would  be  a  profit  of  4/5  of  ic.  to  the  cigar? 

Mr.  KRAUSS.    Not  to  the  manufacturer;  probably  to  the  dealer. 

MR.  LONGWORTH.  If  the  duty  was  added,  that  would  be  1/5  of  ic.  for 
each  cigar.  According  to  you  that  would  add  ic.  to  the  selling  price  to 
the  consumer,  or  make  a  net  additional  profit  of  4/5  of  ic.? 

Mr.   KRAUSS.     Yes;  provided   you   have   those  units   to    work  with. 

MR.  LONGWORTH.  .  .  And  you  say  that  would  add  2c.  to  the  cost  of  a 
cigar  ? 

MR.  KRAUSS.  I  did  not  say  2C.,  I  said  probably  ic.,  because  there  is 
not  any  intermediate  method  of  exchange  (p.  1363). 

Mr.  Chairman,  that  principle  could  be  and  undoubtedly  would 
be  applied  to  every  turnover  sales  tax  where  the  amount  of  tax 
was  too  small  to  have  any  other  "intermediate  method  of  ex- 
change." 


TAXATION  179 

It  must  be  remembered  that  the  soft-drink  and  cigar  tax  was 
not  levied  until  the  sale  was  made  by  the  wholesaler  or  retailer 
to  the  customer,  and  these  sales  did  not  involve  more  than 
two  turnovers  with  only  one  tax,  whereas  the  proposed  turnover 
sales  tax  sought  to  be  enacted  into  law  would  mean  a  tax  levied 
and  collected  on  from  eight  to  ten  turnovers  in  some  instances 
as  have  been  heretofore  disclosed. 

Nothing  need  be  added  by  way  of  argument  to  show  how 
vicious  and  mischievous  a  turnover  sales  tax  is  certain  to  be 
when  nothing  prevents  the  cupidity  of  the  seller,  on  the  one 
hand,  from  taking  advantage  of  the  necessity  or  ignorance  of 
the  consumer,  on  the  other,  with  a  well-founded  possibility  that 
wholesale  evasions  of  the  tax  or  neglect  to  report  will  ensue,  as 
stated  in  findings  of  the  National  Industrial  Conference  Board's 
committee. 

Taxing  and  Padding  From  Producer  to  Consumer,  400  Per  Cent 

Increase 

Only  one  further  illustration  will  be  offered.  When  the  rail- 
way bill  was  before  Congress  last  session  Director  General 
Hines  stated  that  an  increase  of  $875,000,000  in  freight  rates 
would  mean  an  increase  to  the  consumer  of  $4,375,000,000,  or 
400  per  cent  increase,  because,  as  stated  by  Chairman  Woolley, 
of  the  Interstate  Commerce  Commission,  "The  shipper  passes 
this  along  to  the  consumer  and  on  back  to  the  producer  of  the 
raw  material,  who  has  to  stand  the  cost  of  transportation." 

The  effect  of  increased  freight  rates  that  has  served  to 
prevent  any  reduction  of  ordinary  commodities  to  pre-war  prices 
from  a  riot  of  padding  and  ballooning  of  prices  is  also  made 
possible  in  a  sales  tax  under  the  beneficient  consumption  turn- 
over tax  plan. 

Sales  Tax  Laws,  Where  and  How  Enforced  Today 

Without  attempting  to  set  forth  specific  terms  or  scope  of 
existing  sales  tax  laws  it  is  noted  that : 

Canada's  sales  tax  law  of  1915  (assented  to  July  I,  1920) 
provides  for  a  tax  on  banking  and  negotiable  instruments.  The 
tax  is  laid  on  final  sales  of  various  luxuries  and  on  high-priced 
wearing  apparel  not  ordinarily  worn  by  10  per  cent  of  the  people 
with  a  minimum  price  fixed  by  law  above  which  the  tax  applies. 
A  tax  also  is  collected  on  goods  sold  by  wholesalers  and  jobbers, 
but  not  on  plain  foodstuffs. 


i8o  SELECTED   ARTICLES 

The  French  turnover  tax  (1920)  applies  to  luxuries  set  forth 
in  schedules  A  and  B  of  the  law  as  distinguished  from  neces- 
sities and  is  much  like  the  Canadian  law,  in  that  it  does  not 
reach  necessary  foodstuffs.  The  French  law  was  passed  by  a 
Government  with  less  than  one-third  the  estimated  wealth  of 
our  own  and  with  a  national  debt  of  $46,000,000,000,  or  double 
our  own  after  crediting  foreign  loans.  Its  sales  tax  law,  enacted 
to  meet  a  critical  national  financial  emergency,  has  been  in  force 
less  than  one  year,  but  actual  receipts  have  only  reached  about 
47  per  cent  of  those  estimated  by  its  advocates  when  the  law 
was  passed.  Due  to  many  exemptions  and  presumable  difficulties 
in  administration,  Canadian  receipts  from  the  sales  tax  in  that 
country  are  in  like  manner  disappointing. 

The  Philippine,  1917,  Mexican,  1906,  and  German,  1920,  turn- 
over taxes  should  each  and  all  delight  the  hearts  of  Messrs. 
Kahn,  Bache,  and  Rothschild,  leading  exponents  of  the  tax  here, 
although  the  gentlemen  named  have  not  found  any  of  these  coun- 
tries sufficiently  attractive  to  renounce  citizenship  or  residence 
in  the  United  States  because  of  more  agreeable  tax  laws  to  be 
found  elsewhere. 

The  Philippine,  Mexican,  and  German  Turnover  Tax 

The  Philippine  tax  has  been  pointed  to  as  a  model  for  the 
United  States.  Industries  in  the  Philippines  are  largely  found 
in  or  around  its  one  large  city — Manila — and  due  to  isolation 
of  the  islands  the  law  is  not  difficult  to  administer.  This  turn- 
over sales  tax  is  a  relic  of  the  old  Spanish  regime,  and  the  tax 
was  also  laid  by  Spain  on  Mexico.  It  is  a  legacy  from  a  Gov- 
ernment that  notably  failed  in  its  cruel  administration  in  both 
these  countries,  and  curiously  enough  no  law  of  the  kind  is  in 
effect  in  Spain.  I  quote  hereafter  as  to  the  Philippine  and 
Mexican  methods  of  administration,  if  to  be  applied  here,  based 
on  statement  of  H.  B.  Fernald,  of  New  York  City,  before  the 
industrial  tax  board — page  66,  hearings. 

It  is  also  noteworthy  that  a  statement  from  Martin  R. 
Bourne,  of  New  York,  urging  the  Philippine  sales  tax  on  Con- 
gress, claims  the  same  rate  of  tax  which  raises  $7,000,000,  or 
$i  per  capita  in  the  Philippines,  will  raise  $2,000,000,000,  or 
$20  per  capita,  in  the  United  States.  In  view  of  the  further 
argument  that  a  sales  tax  is  practically  a  poll  tax  based  on 
consumption  of  each  taxpayer,  the  effect  of  the  argument  is 


TAXATION  181 

clear  that  the  American  citizen  will  pay  twenty  times  as  much 
as  the  Filipino  under  the  same  kind  of  tax. 

Germany's  turnover  tax  law  approaches  the  ideal  tax  pic- 
tured by  advocates  of  the  system.  Its  name  there,  "umsatz- 
steuergeset,"  comprehends  several  turnovers  at  the  outset.  The 
law  levies  turnover  taxes  on  sales,  both  wholesale  and  retail, 
but  its  exemptions  thoughtfully  cover  a  number  of  banking 
transactions,  including  exchanges  of  bank  notes,  paper  money, 
and  so  forth,  which  exceptions  would  presumably  be  urged  by 
"experts"  for  any  law  enacted  here. 

A  tax  of  \l/i  per  cent  on  necessaries,  15  per  cent  on  sales 
classed  as  luxuries,  and  10  per  cent  on  all  advertisements  not 
connected  with  public  elections  in  Germany  contribute  toward 
the  $57,000,000,000  indemnity  burden  recently  levied  by  Great 
Britain,  France,  and  Belgium  on  a  defeated  foe,  but  why  should 
Messrs.  Kahn,  Bache,  Rothschild,  or  Goldsmith,  its  advocates 
here,  collect  their  pound  of  flesh  from  the  American  laborer, 
whose  needs  are  to  be  substituted  for  excess  profits  taxes  just 
because  that  tax  is  yielded  up  in  Germany  through  force  of 
arms? 

England  has  repudiated  any  turnover  tax  sales  law,  root  or 
branch.  Canada  and  France  are  conducting  very  limited  ex- 
periments with  luxury  taxes  that  are  disappointing  and  irri- 
tating in  administration  and  revenue. 

The  only  turnover  sales  tax  laws  in  Governments  of  com- 
parative importance  are  found  in  Mexico  and  Germany,  where 
the  iron  hand  of  revolution  has  turned  over  Governments  and 
ruthlessly  imposed  turnover  taxes  as  one  of  the  chief  fruits  of 
revolution. 

Do  we  want  such  laws  for  the  United  States?    If  so,  why? 

Who  Is  Pushing  a  Turnover  Sales  Tax? 

Let  us  now  examine  the  "experts"  and  authorities  (?)  who 
are  pressing  a  turnover  sales  tax  on  Congress.  Singularly 
enough,  none  of  the  twenty  members  of  the  tax  committee 
representing  two  of  the  largest  commercial  organizations  in  the 
country  were  called  before  the  Ways  and  Means  Committee  to 
give  us  the  benefit  of  their  study  and  investigations,  nor  do 
these  important  reports  appear  anywhere  in  the  hearings,  nor 
has  any  reference  been  made  to  them  to  my  knowledge. 

Practically  the  only  witnesses  who  have  appeared  before  the 


182  SELECTED   ARTICLES 

Ways  and  Means  Committee,  aside  from  Dr.  Adams,  of  the 
Treasury  Department,  are  Julius  Bache,  a  banker  and  broker, 
New  York  City;  Otto  Kahn,  a  banker  and  broker,  New  York 
City;  and  Meyer  Rothschild,  also  from  New  York  City;  although 
Mr.  Klein  and  Mr.  Goldsmith,  "accountants,"  also  appear  on  dif- 
ferent phases  of  the  income  tax  law  as  it  affects  their  clients. 

The  Sales  Tax:  Versus  a  Head  Tax 

A  short  expeditious  tax  collection  has  been  suggested  by 
other  authorities,  that  may  yet  be  urged  by  Messrs.  Kahn,  Bache, 
Rothschild,  and  Goldsmith  on  Congress.  It  is  much  simpler 
than  the  excess  profits  tax  law,  which  causes  these  income 
authorities  to  spend  sleepless  nights  in  preparing  tax  reports. 
It  will  save  them  the  necessity  of  investing  their  large  incomes 
in  tax-exempt  securities  in  order  to  avoid  the  higher  surtaxes. 
In  fact,  while  it  resembles  a  turnover  sales  tax,  so  ably  defended 
by  these  gentlemen,  in  that  it  would  reach  every  man,  woman, 
and  child  through  the  food  and  clothing  individually  worn,  yet 
it  would  save  the  objection  of  profiting  and  tax  pyramiding, 
which  is  a  conceded  evil  of  the  turnover  sales  tax.  It  also 
reaches  to  the  very  base  of  fundamental  taxation. 

It  is  urged  Congress  could  reach  the  same  result  advocated 
by  Messrs.  Kahn,  Bache,  Rothschild,  and  Goldsmith  and  at 
the  same  time  avoid  a  needless  pyramiding  turnover  tax  by 
enacting  a  poll  or  head  tax.  By  transferring  the  $1,000,000,000 
of  excess  profits  and  surtaxes  that  now  worries  those  obliged 
to  pay  such  taxes  over  to  a  poll  or  head  tax  the  tax  could  not 
be  avoided  by  the  taxpayer  and  collection  annually  would  then 
be  as  easy  as  taking  the  census. 

Messrs.  Kahn  and  Bache  might  urge  it  be  provided  by  law 
that  the  head  of  the  house  would  pay  a  tax  levy  of  $10  per  head 
for  each  member  of  his  family,  based  on  the  per  capita  share 
of  each  inhabitant  who  is  now  asked  to  shoulder  the  $1,000,000,000 
tax  burden  of  the  rich.  If  any  tax  was  not  promptly  paid,  it 
might  hamper  the  Government  to  put  the  wage  earner  in  jail; 
so,  like  the  good  old  distress-for-debt  practices  in  Germany 
and  England,  from  which  some  of  our  modern  sales  tax  author- 
ities spring,  the  law  might  seize  a  member  of  the  family,  say  one 
of  the  children,  who  Bache  says  will  not  pay  anyhow  if  it  does 
not  consume,  and  the  wage  earner  would  then  be  left  free  to 
earn  the  tax. 


TAXATION  183 

Large  Taxes  from  Large  Families  a  Certainty 

Take  the  case  of  Mr.  Bland,  a  constituent  of  Congressman 
Small,  with  twenty-six  children;  his  head  tax  of  $10  each  would 
reach  $280,  which  would  include  himself  and  his  wife.  In  the 
case  of  a  constituent  of  my  own,  with  seventeen  living  children, 
he  would  only  have  to  raise  $190,  which  would  include  himself 
and  wife.  Of  course,  these  farmers  are  also  paying  local  taxes 
on  their  farms  for  the  support  of  their  schools,  local  improve- 
ments, and  State  institutions,  but  they  might  put  in  a  few  extra 
hours  daily  in  earning  the  extra  tax  that  Messrs.  Kahn,  Bache, 
Rothschild,  and  Goldsmith  would  then  have  taken  from  their 
own  shoulders,  and  thus  we  would  avoid  the  need  of  a  general 
pyramiding  sales  tax. 

The  system  suggested  would  possess  the  additional  virtue  of 
having  direct  action,  and  that  is  what  these  New  York  bankers 
are  seeking.  True,  Bland,  the  farmer  is  probably  working  four- 
teen hours  a  day  already,  while  Kahn,  Bache,  and  Rothschild 
have  a  minimum  unwritten  law  of  nearer  four  hours,  and  there 
may  be  other  matters  of  detail  that  would  arise,  but,  as  Mr.  Kahn 
well  says,  "No  law  is  absolutely  perfect."  However,  such  a 
law  would  solve  the  mental  struggles  of  excess  profits  tax- 
payers and  is  well  for  them  to  consider  as  an  alternative  for 
the  sales  tax. 

Of  course,  Congress  would  take  an  extended  leave  of  absence 
after  passing  any  such  measure,  and  probably  the  next  Con- 
gress, of  different  Members,  might  enact  an  extreme  capital 
tax  which  would  get  more  quick  profits  than  under  the  present 
excess  profits  tax  system;  but  as  a  temporary  relief  it  is  sub- 
mitted that  the  kind  of  a  tax  for  these  distinguished  gentlemen 
to  advocate  is  a  head  tax,  or  poll  tax,  although  the  latter  term 
would  have  a  singularly  unpleasant  sound  to  those  who  had 
to  submit  their  candidacies  at  the  polls  after  enacting  the  law. 

Prejudiced  Tax  Experts 

Speaking  personally,  I  believe  Messrs.  Kahn,  Bache,  Roths- 
child, and  those  they  represent  should  be  made  to  pay  every 
dollar  of  taxes  due  from  them  under  existing  laws,  and  they 
should  pay  taxes  according  to  their  ability.  Any  attempt  to 
avoid  payment  of  taxes  by  investing  in  tax-exempt  securities 
ought  to  be  met,  so  far  as  possible,  by  drastic  legislation  until  a 
constitutional  amendment  can  be  passed. 


184  SELECTED   ARTICLES 

The  tax  dodger  of  today  is  not  the  poor  man  whose  home  and 
farm  is  immediately  sold  for  taxes,  with  stiff  penalties  when  it 
is  redeemed.  He  can  not  avoid  payment  of  his  taxes  by  invest- 
ment in  tax-free  securities  or  other  means,  and  every  dollar 
spent  by  him  for  taxes  is  ordinarily  taken  from  some  need  of 
the  family. 

The  tax  dodgers  and  prejudiced  tax  experts  are  not  found 
among  this  class  of  people,  but  the  man  who  unblushingly  tells 
the  Ways  and  Means  Committee  he  is  investing  his  surplus  cash 
in  tax-exempt  bonds ;  who  publicly  says  he  spends  eleven  months 
of  the  year  studying  how  to  evade  our  tax  laws;  who  says 
if  the  poor  do  not  want  to  pay  a  sales  tax  they  need  not 
consume;  who  unblushingly  declares  in  one  breath  that  he  shifts 
all  his  taxes  over  onto  the  ultimate  consumer,  while  in  the  next 
breath  he  demands  a  repeal  of  the  excess  profits  tax,  because 
it  is  a  heavy  burden  on  the  rich;  the  wealthy  banker  who 
pompously  says  to  the  country  in  his  six  by  nine  pamphlet  that 
only  one  man  on  the  Ways  and  Means  Committee  understands 
the  revenue  question,  and,  therefore,  he — Bache — must  come  to 
Washington  in  order  to  instruct  the  committee  regarding  the 
tax  he  wants — this  kind  of  tax  expert  will  find  new  apologists, 
even  among  his  own  fellows,  and  he  is  out  of  touch  with  99 
per  cent  of  the  one  hundred  million  people  for  whom  he  asks 
Congress  to  pass  a  sales  tax  law. 

Who  Will  Pay  the  Sales  Tax? 

Let  us  for  a  moment  study  a  picture  of  human  existence  and 
the  proposed  taxation  scheme. 

Of  the  one  hundred  six  million  people  in  this  country  it  is 
doubtful  if  i  per  cent  are  making  $5,000  annually,  mentioned  in 
one  discussion  by  Mr.  Kahn,  nor  do  they  pay  any  appreciable 
income  tax.  Ninety-five  per  cent  certainly  are  among  those  who 
grub  along  for  less,  and  half  of  the  total  presumably  are  living 
on  net  incomes  of  $1,000  or  less  received  by  the  family  bread- 
winner. This  amount  has  not  much  more  than  one-half  the  pur- 
chasing power  of  ten  years  ago.  In  other  words,  the  astounding 
report  that  a  large  part  of  labor  received  $700  or  less  annually 
ten  years  ago  was  no  more  serious  than  conditions  of  today  - 
particularly  when  over  two  million  breadwinners  are  out  of  em- 
ployment. Immaculately  dressed  Messrs.  Kahn,  Bache,  Roths- 
child, and  Goldsmith  do  not  represent  these  people. 


TAXATION  185 

Those  they  represent  who  clipped  bonds  or  interest  coupons 
during  the  war  then  took  no  chances.  Their  living  expenses, 
luxuries,  and  limousines  never  occasion  them  worry  now.  Yet 
they  protest  against  turning  over  to  the  Government  part  of 
their  "excess"  profits,  not  of  their  reasonable  profits  but  a 
part  of  their  "excess  profits."  They  declare  that  individual 
enterprise,  ambition,  and  initiative  will  be  hampered  by  parting 
with  any  excess  profits. 

Of  the  one  hundred  million  people  whom  Congress  repre- 
sents, I  believe  statistics  would  show  90  per  cent  are  no  better 
off  today  financially  than  before  the  war,  although  the  great 
demand  for  labor  during  the  war  is  so  recent  that  the  country 
has  not  yet  recovered  from  its  financial  orgy  to  take  an  account- 
ing of  stock.  That  is  the  situation  confronting  the  country  and 
Congress  when  Messrs.  Kahn,  Bache,  Rothschild,  and  Goldsmith 
demand  that  "the  burden  now  upon  the  rich,"  to  use  Kahn's 
words,  must  be  shifted  to  the  one  hundred  million.  In  other 
words,  that  an  income  of  over  $1,000,000,000,  counting  the 
excess  profits,  collections,  and  higher  surtax  now  paid  by  less 
than  5  per  cent  of  our  people,  must  be  shifted  over  to  the 
backs  of  the  remaining  95  per  cent  by  a  consumption  tax.  Under 
that  beneficent  proposal  every  turnover  tax  will  be  paid  as  stated 
from  the  time  sugar  beets  are  first  sold  to  the  last  sale  of 
refined  sugar  by  retailer;  from  the  sale  of  wheat  at  the  elevator 
to  the  final  sale  of  bread  or  breakfast  food  by  the  grocer;  from 
the  sale  of  the  steer  or  hog  by  the  farmer  to  the  sale  of  shoes 
by  the  retailer  or  wienerwursts  by  the  lunch  stand — and  for 
every  eater  of  porterhouse  a  score  patronize  the  wienerwursts. 

Pyramiding  From  Producer  to  Consumer — Where  Does  the  Re- 
tailer Come  in? 

From  five  tax  levies  to  ten  tax  levies  are  made  between 
the  first  sale  and  the  last  of  the  completed  article,  depending 
upon  the  "turnovers."  The  tax  may  be  insignificant  but  after 
witnessing  the  cupidity,  greed,  and  profiteering  of  the  past  three 
years  in  America,  the  public  must  pay,  irrespective  of  cost  or 
reasonable  profits,  and  no  sensible  man  believes  that  the  tax 
added  to  the  article  by  the  different  middlemen  from  first 
producer  to  final  consumer  will  be  that  fixed  by  law.  If  it  is 
i  per  cent  with  five  turnovers  it  is  more  likely  to  be  25  per 
cent  by  the  time  the  many  turnovers  occur  and  before  the 


186  SELECTED  ARTICLES 

finished  article  is  received  the  turnover  tax  and  much  more,  is 
pyramided  each  time  and  is  added  to  the  cost  of  the  article  on 
which  the  next  turnover  tax  is  levied,  as  had  been  disclosed 
by  Senator  Hardwick.  In  many  cases  it  is  fair  to  suppose  that 
where  the  Government  would  receive  a  total  of  5  per  cent  in 
taxes  on  the  different  values  for  that  sold,  the  consumer  will 
pay  from  25  per  cent  to  50  per  cent  or  even  100  per  cent  ad- 
ditional, 90  per  cent  of  which  additional  charge  will  go  into  the 
tills  of  the  different  turnover  dealers.  That  is  one  reason  retail 
merchants  and  other  dealers  have  no  fault  to  find  with  the  turn- 
over sales  tax  plan  and  are  easily  caught  by  the  argument. 

That  is  a  reason  why  Mr.  Lew  Hahn,  managing  director  of 
the  National  Retail  Dry  Goods  Association,  is  said  to  be  in  con- 
ference with  "members  of  the  Senate  Finance  Committee  and 
of  the  Ways  and  Means  Committee  of  the  House"  (Washing- 
ton Times,  January  25). 

These  retailers  do  not  pay  the  sales  tax  which  Mr.  Hahn  and 
Mr.  Kahn  and  Mr.  Bache  and  Mr.  Rothschild  and  Mr.  Gold- 
smith favor.  The  retailers  are  the  ones  who  will  pyramid  prices 
and  collect  from  the  consumers  large  margins  even  as  they  try 
to  do  today. 

Notwithstanding  manufacturers  and  wholesalers  have  slashed 
prices  to  retailers  according  to  published  statements,  the  large 
retailer  still  charges  his  heavy  profit  without  yet  having  learned 
that  the  war  ended  more  than  two  years  ago.  The  retailer  has 
nothing  to  fear  from  the  turnover  sales  tax  because  he  does  not 
pay  it — he  passes  it  on  to  the  consumer  and  his  advocacy  of 
the  sales  tax  is  entitled  to  close  scrutiny  particularly  if  he  is 
now  seeking  to  escape  paying  an  excess  profits  tax  through  the 
shift. 

Everybody  to  Pay  the  Same  Tax 

A  sales  tax  hits  the  ultimate  consumer  who  generally  pays 
the  final  bill,  including  freight  bills,  taxes,  and  every  charge 
that  goes  to  make  up  the  last  selling  price.  All  people  will  pay 
the  same  and  thereby  can  learn  the  blessings  of  taxpaying  in 
real  earnest.  The  molder  in  the  foundry  will  pay  the  same  as 
Otto  Kahn,  banker,  for  his  sugar,  with  the  same  profits  and 
tax  added  in  both  cases;  the  miner  digging  coal  will  pay  the 
same  as  Jules  Bache,  New  York  banker,  for  the  meat,  flour, 


TAXATION  187 

and  potatoes  with  the  same  tax  added;  the  farmer  will  pay 
the  same  as  Rothschild  and  Goldsmith  for  the  same  grade  of 
shoes,  shirts,  or  clothes,  with  the  same  tax  added  although  neither 
Kahn  nor  Bache  nor  Rothschild  will  draw  heavily  on  the  kind 
of  goods  the  farmer  or  laborer  wears.  The  workman  with  his 
flivver  will  pay  the  same  tax  on  his  gasoline  that  Rockefeller 
himself  pays,  in  order  to  pile  up  excess  profits  for  Standard  Oil 
that  are  no  longer  to  be  taxed  according  to  Messrs.  Bache,  Kahn, 
Goldsmith,  and  Rothschild. 

The  farmer  will  pay  the  new  price  for  his  axe  and  other  tools 
that  Carnegie  exacts  through  the  Steel  Trust,  and  the  excess 
profits  tax  formerly  paid  by  the  trust  is  now  to  be  shifted  to  the 
final  purchaser — in  order  not  to  destroy  initiative  in  business. 
The  soldiers  whom  we  sent  to  war  to  protect  the  property  of 
Kahn,  Bache  et  al.  from  German  tribute — these  men  who  saved 
the  day — will  now  pay  the  same  turnover  tax  as  Kahn  et  al. 
This  is  the  beneficent  scheme  known  as  a  consumption  tax,  or 
a  turnover  sales  tax,  that  these  bankers  and  financiers  ask  Con- 
gress to  place  on  the  backs  of  the  one  hundred  million  people 
whom  we  represent. 

Inflation  and  Deflation  Laid  to  Taxes 

In  a  hope  of  escaping  excess  profits  taxes  the  proponents  of 
the  repeal  paint  in  somber  colors  the  terrible  distress  of  busi- 
ness occasioned  by  the  excess  profits  tax  and  the  beautiful 
picture  of  every  man  bearing  his  own  share  of  the  burden 
under  a  consumption  sales  tax. 

Every  business  reverse,  every  annoyance,  is  laid  to  the  excess 
profits  tax.  When  prices  were  high  Kahn  et  al.  claimed  prices 
were  high  because  the  excess  profits  were  always  added.  When 
the  balloon  burst  and  prices  dropped  Kahn  et  al.  pointed  to 
the  drop  as  a  business  distress  caused  by  the  drain  of  an  excess 
profits  tax.  Notwithstanding  the  tax  only  reaches  a  part  of  the 
excess  profits  over  reasonable  profits  of  8  per  cent,  the  tax  is 
protested  by  many  men  who  pay  it  in  the  same  breath  that  they 
confidently  declare  they  pass  the  tax  on  to  the  other  fellow. 

One  ounce  of  fact  is  worth  a  ton  of  theory,  and  a  few  un- 
prejudiced witnesses  are  worth  all  the  Kahns,  Baches,  Roths- 
childs, and  Goldsmiths  in  the  universe  who  are  special  pleaders 
for  special  interests. 


188  SELECTED   ARTICLES 

As  heretofore  stated,  several  hundred  witnesses  appeared  be- 
fore the  Ways  and  Means  Committee  on  tariff  schedules.  They 
employ  hundreds  of  thousands  of  men  in  the  aggregate  and  have 
paid  many  millions  of  dollars  in  excess  profits  taxes  on  their 
factory  earnings  in  the  aggregate,  yet  not  one  of  these  men 
complained  of  the  excess  profits  law  as  a  hindrance  to  his 
business  nor  as  a  bar  to  incentive.  Search  the  hearings  of  these 
hundreds  of  witnesses  and  not  one  seconds  the  demand  of 
Messrs.  Otto  Kahn,  Jules  Bache,  Rothschild  and  Goldsmith, 
bankers,  brokers,  and  special  pleaders.  What  more  significant 
illustration  of  the  difference  in  attitude  between  the  coupon- 
clipping  and  stock-market  juggling  business  compared  to  actual 
producers,  employers  of  labor,  and  contributors  to  the  country's 
prosperity.  It  is  the  difference  between  the  broker  and  the 
producer,  whether  he  be  farmer,  factory  hand,  or  manufacturer. 

Real  Tax  Authorities  versus  "Wobblers  and   Waverers" 

Thus  far  I  have  presented  to  you  the  findings  of  two  impor- 
tant tax  committees,  representing  thousands  of  manufacturers 
and  hundreds  of  chambers  of  commerce  throughout  the  country. 
These  findings  in  both  cases  specifically  repudiate  a  consump- 
tion tax  and  point  out  dangers  which  would  not  occur  to  novices 
or  superficial  students  of  the  subject.  I  have  also  quoted  from 
the  Secretary  of  the  Treasury's  report  specifically  rejecting  a 
consumption  tax  both  in  principle  and  as  an  administrative 
proposition. 

Quotations  have  also  been  furnished  showing  conclusively 
that  taxes  are  loaded  and  this  heavy  load  in  addition  to  the 
tax  will  be  passed  on  to  the  consumer  under  a  turnover  consump- 
tion tax. 

These  high  authorities  are  opposed  by  several  New  York 
bankers,  brokers,  and  accountants,  one  of  whom,  Mr.  Kahn,  has 
"wabbled  and  wavered"  for  many  months  and  has  not  yet 
found  his  equilibrium.  Mr.  Bache  goes  Mr.  Kahn  one  better,  as 
I  have  shown,  and  says  all  income  taxes  and  all  corporation 
taxes  should  be  wiped  out  and  a  turnover  consumption  tax  sub- 
stituted. He  adds  that  he  is  placing  his  own  funds  in  tax- 
exempt  securities  as  rapidly  as  possible.  Mr.  Rothschild  be- 
lieves like  Mr.  Bache,  but  does  not  advocate  going  the  limit  at 
this  time.  These  three  experts  were  before  the  National 


TAXATION  189 

Industrial  Board  tax  committee  and  their  untested  theories  were 
there  rejected.  However,  they  are  persistent;  they  have  mil- 
lions of  dollars  in  annual  taxes  at  stake  among  those  they  rep- 
resent; they  have  a  vigorous,  expensive  propaganda  and  are 
well  organized. 

They  were  practically  the  only  witnesses,  by  a  curious  circum- 
stance, on  the  subject  before  the  Ways  and  Means  Committee, 
except  Dr.  Adams,  who  opposes  a  turnover  tax,  and  Bache  in- 
forms the  country  in  this  pamphlet  that  he  has  grapevine  intelli- 
gence that  Adams  does  not  count  with  the  Ways  and  Means 
Committee  when  it  comes  to  preparing  a  bill.  These  are  the 
financially  interested  witnesses  who  are  seeking  to  have  Con- 
gress relieve  them  of  their  taxes  and  to  saddle  their  tax  burdens 
on  the  general  public. 

They  point  to  Canada,  Philippines,  and  France  to  prove  that 
a  turnover  sales  tax  is  desirable  for  the  United  States.  At  the 
risk  of  appearing  to  give  undue  weight  to  their  arguments,  I 
will  quote  from  the  opinions  of  men  who  have  given  the  tax  sub- 
ject here  and  abroad  profound  and  exhaustive  study.  If  the 
conclusions  of  the  tax  committee,  already  quoted,  were  convinc- 
ing, the  reasons  advanced  by  the  following  witnesses  are  con- 
clusive : 

Testimony  of  Tax  Experts  Against  a  Sales  Tax 

Arthur  A.  Ballantine,  attorney  at  law,  New  York  City,  for- 
merly Solicitor  of  Internal  Revenue,  says,  page  32,  hearings 
National  Industrial  tax  committee : 

I  believe  that  this  idea  of  a  sales  tax,  a  tax  collected  everywhere, 
falling  on  no  one,  is  a  will-o'-the-wisp  which  has  floated  over  this  field 
of  taxation  and  which  is  in  danger  of  luring  business  men  who  approach 
Congress  in  an  effort  to  get  really  beneficial  changes  into  futile  action 
instead  of  constructive  action. 

I  believe  that  this  committee,  by  the  very  careful  and  exhaustive  con- 
sideration which  it  has  given  to  the  advocates  of  this  plan  and  its  careful 
thought  as  to  conclusions,  has  done  much  to  dissipate  this  myth  and  to 
direct  the  efforts  of  business  men  into  practical  channels  instead  of  down 
a  pathway  which  leads  to  futility. 

For  the  second  witness  I  quote  from  Charles  A.  Andrews, 
whose  frank,  clear  analysis  of  the  sales  tax  is  illuminating. 
He  says  (p.  38)  : 

There  was  on  the  committee  no  vociferous  objector  to  the  sales  tax. 
There  was  on  the  committee  nobody  who  was  loaded  to  kill  it.  We 
started  in  upon  the  assumption  that  we  were  going  to  work  out  something 
in  the  form  of  a  sales  tax.  We  invited  various  well-informed  people  to 
come  before  us.  We  reached  out  and  got  printed  matter  and  manuscripts; 


IQO  SELECTED   ARTICLES 

we  made  investigations;  and  slowly  but  steadily  the  committee  was  driven 
to  the  inevitable  conclusion  that  it,  representing  a  large  body  of  business 
men,  could  not  bring  before  this  conference  a  recommendation  for  any 
form  of  sales  tax,  except  as  the  same  related  to  a  few  specific  articles, 
suggestions  as  to  which  we  have  made,  and  which  have  been  referred  to 
by  Mr.  Armitage. 

We  haven't  the  nerve,  as  good  citizens  of  the  country — which  we 
believe  we  are,  and  are  trying  to  be — to  say  to  a  body  of  business  men 
in  this  country,  who  are  suggesting  that  business  be  relieved  from  a 
billion  dollars  of  excess  profits  tax,  that  we  propose  a  tax  which  will 
cause  the  billion  to  be  paid  by  the  ultimate  consumer.  That  is  such  a 
violent  divergence  from  the  principle  of  payment  upon  the  basis  of  ability 
to  pay  that  we  can  not  ask  this  body  of  business  men  to  get  behind  that 
sort  of  a  tax. 

We  do  not  believe,  in  this  day  and  generation — and  following  the 
World  War,  instead  of  following  the  Napoleonic  wars — that  we  have  any 
business  to  propose  seriously  to  the  Congress  of  the  United  States  a  tax 
of  a  billion  dollars,  or  two,  or  three  (I  don't  know  how  much  it  would 
produce — all  those  figures  are  given),  to  be  paid  by  the  ultimate  consumer, 
and  organized  business  excused  from  its  $1,000,000,000  of  excess  profits 
tax. 

We  don't  think  that  is  good  citizenship;  and  we  don't  think  that  is 
good  economics.  That  is  the  real  reason  that  we  disposed  of  or  rejected 
the  sales  tax,  upon  the  assumption  that  the  tax  is  paid  by  the  ultimate 
consumer. 

Well,  let  us  assume  that  the  tax  all  remained  with  the  original  payer 
of  it,  and  that  it  is  not  passed  on  to  the  consumer.  Does  it  then  become 
a  tax  which  we  can  justify  ourselves  in  recommending  to  Congress?  Your 
committee  says  "No."  .  .  .  "Why?  If  the  tax  remains  with  the  individual 
or  concern  which  originally  pays  it,  and  he  is  not  able  to  pass  it  on,  it 
becomes  a  tax  measured  in  terms,  although  not  so  stated,  of  his  gross 
receipts;  and  as  such,  in  the  opinion  of  your  committee,  it  is  open  to 
such  serious  objections  that  we  can  not  ask  Congress  to  pass  it.  .  .  A  tax 
on  gross  receipts  which  leaves  out  of  the  equation  all  the  difference  in 
cost  of  the  conduct  of  your  business  as  compared  to  mine — perhaps  it 
takes  90  per  cent  of  my  gross  receipts  to  conduct  my  business  and  pay  my 
expenses;  perhaps  it  takes  50  per  cent,  or  70  per  cent,  or  95  per  cent 
of  yours — is  an  unjustifiable  tax.  .  .  The  establishment  of  a  tax  like  that 
would,  in  the  opinion  of  your  committee,  produce  such  inequalities  that 
our  dissatisfaction  with  the  excess  profits  tax  would  be  as  nothing,  and 
we  would  find  ourselves  in  the  face  of  inequalities  vastly  greater  than 
heretofore.  .  .  It  is  uneconomic  in  its  nature;  it  is  indefensible  in  our  opin- 
ion, in  the  twentieth  century,  if  it  is  a  general  tax  on  all  consumptions; 
and  for  other  reasons  it  is  equally  indefensible  if  it  becomes  a  tax  in 
terms  of  gross  receipts,  which  term  means  nothing  so  far  as  it  relates 
to  the  ability  to  pay  taxes. 

Bache  Shows  How  to  Avoid  a  Consumption  Tax 

Mr.  Jules  Bache,  called  as  a  hostile  witness  before  that  com- 
mittee, gives  his  own  concept  of  human  nature  and  a  cold- 
blooded alternative  for  the  ultimate  consumer  who  can  not  pay 
the  tax.  He  says,  "Quit  consuming."  I  quote  from  his  state- 
ment before  the  industrial  committee  (p.  58)  : 

Professor  Adams  this  morning  showed  the  greatest  optimism  that  I  have 
ever  heard  voiced  from  the  tribune.  He  states  that  he  believed  the  tax- 
payer was  a  cheerful,  voluntary  honest  man.  That  is  not  my  opinion. 
The  taxpayer — and  I  am  not  attacking  his  honesty  when  I  say  so — spends 
eleven  months  a  year  devising  schemes  by  which,  during  the  first  month 
that  he  tries  to  make  up  his  tax  statement  he  can  avoid  as  many  of  the 
taxes  as  is  legally  possible,  and  he  generally  succeeds  in  avoiding  many 
of  them. 

The  idea  of  putting  a  thrift  tax  into  our  taxes,  which  the  20  per  cent 


TAXATION  191 

limitation  would  be,  is  an  excellent  one,  but  the  greatest  thrift  tax  would 
be  the  turnover  tax,  since  if  anybody  didn't  want  to  pay  any  taxes  he 
could  merely  refrain  from  consuming. 

The  Canadian  Tax  Is  Not  a  Sales  Tax 

W.  C.  Cornwell,  an  employee  of  Mr.  Bache,  read  a  statement 
of  the  Canadian  sales  tax  at  that  same  meeting  (page  60)  to 
which  Robert  G.  Wilson,  chief  of  the  tax  division,  American 
Mining  Congress,  immediately  replied  as  follows : 

I  don't  know  how  many  gentlemen  present  are  familiar  with  the 
Canadian  law,  but  it  has  been  my  fortune  within  the  last  three  or  four 
years  to  spend  some  time  in  Canada,  and,  for  business  reasons,  make 
some  intensive  study  of  the  Canadian  law.  To  my  mind  the  Canadian 
law  is  not  a  sales  tax. 

In  the  first  place,  the  law  of  July  i,  known  in  the  United  States  as  a 
sales  tax,  is  an  amendment  to  the  special  war  revenue  act  of  1915,  which 
is  an  excise  tax  law. 

What  Mr.  Cornwell  has  had  to  say  regarding  the  premier's  statement 
is  true.  The  statement,  however,  is  misleading  in  that  it  refers  to  a 
sales  tax  which,  in  its  effect,  exempts  all  the  prime  essentials  of  life 
from  such  taxes;  it  is  only  an  addition  at  the  rate  of  i  per  cent  and  2 
per  cent  to  excise  taxes — luxury  taxes,  if  you  please — which  rise  some- 
times 50  per  cent  upon  many  commodities — luxuries,  essentials,  and  non- 
essentials.  It  is  not,  as  the  business  men's  tax  committee  has  termed  the 
proposition,  a  sales  tax. 

The  next  witness,  Mr.  J.  F.  Zoller,  tax  attorney  of  the  Gen- 
eral Electric  Co.,  says  at  the  same  committee  hearings,  page  62: 

I  want  to  talk  just  a  minute  on  the  sales  tax.  Now,  we  have  reached 
the  parting  of  the  ways  here  in  regard  to  the  sales  tax.  Personally,  I  am 
opposed  to  it  for  the  reasons  stated  by  Mr.  Andrews.  I  can't  state  those 
objections  any  better  or  as  well  as  he  did.  But  the  situation  as  I  see 
it  is  this:  The  people  who  are  favoring  the  sales  tax  are  those  who  are 
already  required  to  pay  a  sales  tax  under  section  900  of  the  present  law, 
and  their  position  is  that  if  the  Government  can  select  this  industry  and 
impose  a  sales  tax  upon  us,  why  not  spread  it  to  other  taxpayers? 

The  Philippine  Tax  Discussed 

Replying  to  a  statement  filed  by  a  Mr.  Hord,  formerly  col- 
lector of  internal  revenue  of  the  Philippines,  the  next  tax  au- 
thority, Mr.  H.  B.  Fernald,  of  Loomis,  Suffern  &  Fernald,  New 
York,  says,  page  66 : 

The  sales  tax  has  been  spoken  of  as  if  it  were  a  new  thing  of  very 
recent  years.  From  my  experience  with  the  sales  tax  I  go  back  to  two 
things — one  is  the  matter  of  the  Philippine  tax,  the  other  the  matter  of 
the  Mexican  tax.  .  .  Do  you  want  to  place  in  your  business  a  proposition 
where  every  purchaser  is  to  get  a  receipt  on  which  you  are  to  affix  serially 
numbered  stamps  and  where  you  have  to  account  for  all  your  stamps  pur- 
chased and  issued,  subject  to  examination  from  time  to  time,  to  check 
up  as  to  the  number  you  have  left  and  when  you  purchase  them,  and 
where  you  have  to  put  down  the  last  serial  number  you  purchased  and 
the  serial  number  you  are  acquiring  now? 

My  objection  to  the  sales  tax  is  particularly  from  this  standpoint,  and 
it  is  the  same  thing  which  will  apply  to  almost  any  tax,  namely,  when  a 
tax  gets  large  in  amount  and  it  becomes  worth  while  the  taxpayer  will 
look  for  a  means  to  avoid  it.  .  .  It  can  be  eliminated;  it  can  be  gotten 
around.  The  experience  in  Mexico  has  shown  that  conclusively,  and  there- 
fore it  is  a  tax  which  will  be  paid  by  the  small  man,  while  the  large  man, 
who  is  able  to  change  his  business  organization,  can  avoid  it. 


192  SELECTED   ARTICLES 

Why  England  Rejects  a  Sales  Tax 

The  next  witness  is  James  J.  Forstall,  of  Chicago,  attorney 
at  law  and  member  of  the  tax  committee,  who  speaks  of  efforts 
to  pass  a  sales  tax  in  Great  Britain,  the  former  home  of  Mr. 
Kahn.  He  says  (p.  67)  : 

Comment  has  been  made  on  Canada  and  Mexico.  I  would  like  to  say 
that  two  weeks  ago  yesterday,  through  the  courtesy  of  Professor  Haig,  I 
had  an  opportunity  to  discuss  with  one  of  the  members  of  the  British  in- 
come tax  commission  and  with  one  of  the  high  tax  officials  of  the  British 
Government  the  question  of  the  British  taxation  situation.  As  you  prob- 
ably all  know,  they  have  about  as  little  love  for  the  excess  profits  duty 
as  the  Americans  have  for  the  excess  profits  tax,  and  have  been  spending 
two  years  in  trying  to  find  a  substitute,  but  they  haven't  yet  found  it. 
I  asked  each  of  those  gentlemen  whether  the  general  sales  tax  has  been 
considered  as  a  substitute,  and  they  both  said  the  same  thing:  That  it 
had  been  taken  up  and  considered  very  seriously,  but  that  now  they  were 
no  longer  considering  it,  because  they  were  convinced  that  it  was  neither 
an  equitable  tax  nor  feasible  from  an  administrative  standpoint,  nor  one 
which  could  possibly  be  passed  through  Parliament.  • 

The  Cumbersome  Mexican  Sales  Tax  Law 

For  the  next  witness  I  quote  from  A.  E.  Holcombe,  New 
York,  secretary  and  treasurer  of  the  National  Tax  Association. 
He  says: 

I  happen  to  have  with  me  a  copy  of  a  bulletin  which  is  just  about 
to  come  out,  and  in  view  of  the  references  to  other  countries  I  thought 
I  might  read  a  couple  of  sentences  from  the  report  on  the  Mexican  sit- 
uation. It  seems  that  early  in  the  Carranza  regime  he  established  a  com- 
mittee to  look  into  the  entire  financial  system  in  Mexico.  That  committee 
made  an  elaborate  report,  and  it  has  been  reviewed  by  Professor  Chandler, 
of  Columbia,  who  spent  some  time  himself  as  adviser. 

It  is  perhaps  not  too  much  to  say  that  the  most  important  proposal 
to  be  found  in  the  entire  model  plan  (and  that  was  the  name  given  to 
this  report)  is  that  recommending  the  suppression  of  the  sales  tax  through- 
out the  States  of  Mexico.  .  .  It  has  always  been  a  costly  tax  to  collect, 
and  according  to  the  opinion  of  Mexican  officials,  who  are  in  a  position 
to  know,  it  has  constituted  one  of  the  most  cumbersome  impediments  to 
industry  and  commerce. 

How  Farmers  Regard  a  Sales  Tax 

The  next  witness,  J.  R.  Howard,  of  Chicago,  speaks  for  a 
million  and  a  half  farmers  in  the  American  Farm  Bureau  Fed- 
eration. He  speaks  the  sentiments  of  several  million  other  farm- 
ers not  connected  with  the  organization,  of  which  he  is  presi- 
dent. He  says  (p.  68)  : 

The  farmer  is  interested  in  paying  his  just  and  fair  proportion  of 
taxation.  He  believes  every  man,  every  citizen,  should  pay  some  tax, 
because  it  makes  him  a  better  citizen,  but  he  believes  that  that  taxation 
should  be  so  distributed  as  to  be  fair  and  equitable,  and  in  proportion 
to  each  man's  ability  to  pay. 

With  regard  to  the  sales  tax,  let  me  say  that  the  farmer  occupies  a 
unique  position.  I  think  it  has  generally  been  conceded  in  this  discus- 
sion that  the  tax  is  passed  down  to  the  ultimate  consumer.  The  farmer 
can  pass  nothing  to  the  ultimate  consumer,  because  he  buys  at  the  other 
man's  price  and  sells  at  the  other  man's  price,  and  being  at  that 


TAXATION  193 

disadvantage  and  not  able  to  pass  it  on,  he  bears  on  unjust  burden  and  is 
in  a  place  where  I  am  sure  he,  as  a  farmer,  will  object  to  the  broad 
extension  of  the  sales  tax  principle. 

Mr.  H.  C.  McKenzie,  of  Walton,  N.  Y.,  a  member  of  the  tax 
committee,  seconded  Mr.  Howard's  testimony  in  vigorous  lan- 
guage, as  follows: 

I  want  to  take  the  opportunity  to  emphasize  the  farmer's  objections 
to  a  general  sales  tax,  which  have  been  voiced  by  our  president,  Mr. 
Howard,  and  to  call  your  attention  to  just  two  or  three  things  briefly.  .  . 
The  chief  proponent  of  the  sales  tax  has  told  you  that  the  excess  profits 
tax  is  not  only  paid  by  the  ultimate  consumer,  but  that  the  ultimate  con- 
sumer pays  the  tax  two  or  three  times  in  amount.  Now,  if  that  is  right, 
the  corporations  and  people  who  are  doing  this  business  are  receiving  a 
benefit  from  the  excess  profits  tax,  and  the  corporations  and  business  people 
are  the  people  \vho  are  asking  for  its  repeal;  they  are  asking  for  something 
that  is  diametrically  opposed  to  their  own  interests.  According  to  the 
chief  proponents  of  the  sales  tax,  the  sales  tax  is  paid  by  the  ultimate 
consumer  in  its  entirety;  that  is  his  proposition,  as  I  understand  it. 

Now,  your  proposition,  as  developed  by  the  advocates  of  the  sales  tax, 
is  this:  To  take  an  approximate  $1,000,000,000  off  the  excess  profits  tax, 
which  is  now  paid,  as  I  contend,  largely  by  the  corporations,  and  put  it 
over,  according  to  the  proponents  of  the  sales  tax,  on  the  ultimate  con- 
sumer. It  seems  to  me  that  nothing  could  be  more  shortsighted  and  tend 
in  the  end  to  be  a  boomerang,  and  to  be  a  disadvantage  not  only  to  busi- 
ness but  to  capital  than  to  strive  to  shift  the  burden  of  a  billion  dollars 
from  the  business  people  who  now  pay  it  to  the  living  wage — which  is 
what  it  amounts  to — the  ultimate  consumer.  Ninety  per  cent  or  95  per  cent 
of  that  tax  will  be  paid  out  of  the  living  wage,  if  the  contention  of  the 
proponents  of  the  sales  tax  is  correct;  and  I  want  to  say  that  the  farmers 
who  are  represented  in  the  American  Farm  Bureau  Federation  will  never 
in  the  world  stand  for  that  proposition. 

"Farmers  Will  Fight  to  the  End" 

Let  me  interject  a  witness  at  this  point  whose  tenderness  for 
wealth  and  capital  has  no  conspicuous  place  in  his  published 
statement,  from  which  I  quote.  I  offer  an  extract  from  an 
article  given  to  the  press  a  few  days  ago  by  George  P.  Hamp- 
ton, managing  director  of  the  Farmers  National  Council,  an 
organization  representing  an  enormous  constituency.  No  one 
will  doubt  that  equally  forceful  demands  are  voiced  by  the  mil- 
lions of  organized  and  unorganized  labor  who  are  to  be  placed 
in  the  new  class  of  turnover  sales  taxpayers.  Mr.  Hampton 
says: 

In  1918  [Mr.  Hampton  states]  22,696  millionaires  were  estimated  by 
the  eminent  publicist,  Mr.  Richard  Spillane,  to  own  27.2  per  cent  of  the 
national  wealth,  or  over  $68,000,000,000,  while  the  thirty-three  richest 
Americans  owned  property  worth  about  $4,837,000,000,  or,  roughly,  2  per 
cent  of  the  national  wealth.  In  1918  the  national  wealth  was  estimated  to 
be  $250,000,000,000.  It  is  now  estimated  to  be  $500,000,000,000.  Our 
twenty-three  thousand  millionaires  are  probably  worth  now  about  $136,000,- 
000,000,  and  the  thirty-three  richest  Americans  about  $9,675,000,000. 

If  we  estimate  the  net  return  on  this  property  at  only  5  per  cent,  the 
average  income  of  these  twenty-three  thousand  millionaires  is  nearly 
$300,000.  Of  course  many  of  them  have  invested  largely  in  tax-exempt 
bonds  and  own  a  considerable  proportion  of  the  $40,000,000,000  of  such 
tax-exempt  bonds.  While  a  constitutional  amendment  would  enable  the 


194  SELECTED   ARTICLES 

Government  to  tax  the  income  of  these  individuals,  it  will  take  some  time 
to  adopt  such  an  amendment.  A  direct  tax,  however,  could  be  levied 
upon  capital  values,  and  should  be  promptly  levied  by  Congress  instead  of 
seeking  some  method  of  placing  additional  burdens  of  taxation  through 
a  retail  sales  tax,  a  general  sales  tax,  and  other  consumption  taxes  upon 
the  hundreds  of  thousands  of  families  who  today  are  receiving  several 
hundreds  of  dollars  less  than  they  need  to  maintain  the  American  standard 
of  living.  .  .  A  retail  sales  tax  and  other  sales  taxes  and  all  similar  taxes 
on  food,  clothing,  and  shelter,  called  consumption  taxes,  must  be  paid 
chiefly  by  the  workers  on  the  farms,  in  factories,  mines,  and  transportation, 
millions  of  whom  are  getting  less  than  the  minimum  wage  necessary  to 
maintain  a  family  on  a  decent  American  standard. 

Mr.  Hampton  concludes : 

The  full  money  cost  of  the  war  must  be  paid  by  taxes  on  incomes, 
corporation  profits,  estates,  and  privileges.  Such  taxes  will  yield  $7,000,000,- 
oop  to  $8,000,000,000  a  year  for  many  years  without  imposing  any  hard- 
ship upon  anyone.  American  farmers,  who  this  year  have  lost  billions 
through  the  slump  in  farm  prices,  will  fight  to  the  end  the  plan  for  the 
selfish  privileged  interests  to  saddle  the  huge  war  debt  upon  our  people 
for  years,  and  insist  upon  prompt  payment  of  that  debt  by  those  who 
profited  so  hugely  by  the  war  and  by  the  monopolies  built  up  in  this 
country  before  and  during  the  war. 

A  Recognized  Great  Tax  Authority  on  the  Sales  Tax 

I  could  quote  from  many  other  witnesses  who  have  not 
"wabbled  and  wavered"  for  months,  but  the  witnesses  I  have 
cited  against  the  sales  tax  are  tax  students  and  authorities, 
men  who  have  given  the  question  thorough  consideration  in  most 
cases,  are  apparently  unprejudiced,  and  whose  views  are  of 
great  value  in  determining  matters  of  taxation.  One  of  the 
greatest  international  tax  authorities,  whose  textbooks  are 
known  to  every  student  of  taxation,  has  expressed  himself  on 
the  subject  of  a  turnover  sales  tax  as  late  as  October  22  last. 
His  contribution  on  the  sales  tax  here  and  abroad  is  concise, 
fair,  and  positive.  I  quote  from  the  statement  of  Dr.  E.  R.  A. 
Seligman,  of  Columbia  University  (National  Industrial  Tax  Com- 
mittee hearings,  p.  72)  : 

The  sales  tax  is  not  a  novel  tax,  as  the  Premier  of  Canada  said.  If 
he  has  followed  an  academic  course  in  taxation  he  could  have  learned 
of  many  examples,  dating  back  as  far  as  thousands  of  years  ago.  The 
Romans  had  it,  not  to  speak  of  the  Egyptians  and  the  Babylonians.  I 
do  not  want  to  give  a  lecture  on  taxation;  I  am  simply  trying  to  call 
attention  to  the  fact  that  the  sales  tax  has  existed  in  one  form  or  another 
for  a  great  many  years.  With  only  two  exceptions,  it  has  been  abolished 
everywhere  and  has  not  been  rcintroduced  in  any  first-class  country,  and 
those  two  exceptions  are  Germany,  which  reintroduced  it  in  1919,  and 
France,  which,  as  has  been  said,  introduced  it  in  1920.  Now,  before  we 
consider  the  experiences  with  this  tax,  it  must  be  remembered  that  we  can 
learn  little  one  way  or  another,  either  for  or  against  it,  from  Mexico,  or 
Cuba,  or  the  Philippines,  or  Canada,  all  of  which  are  countries  of  insig- 
nificant economic  proportions,  where  we  do  not  find  the  real  kind  of  sales 
tax  that  we  have  been  discussing  today. 


TAXATION  195 

Democracies  Oppose  Sales  Tax  Laws 
Again   (p.  74): 

The  proposition  now  is  to  take  off  one  of  those  three  chief  categories — 
the  tax  on  excess  profits — and  remove  the  burden  from  profits  on  wealth 
or  income,  and  put  it  on  the  other  or  consumption  side.  This  would,  in 
my  opinion,  unduly  shift  the  balance  and  bring  us  too  near  the  position 
formerly  occupied  by  all  the  aristocracies  of  old,  and  still  reflected  in 
some  of  the  European  countries.  .  .  (p.  75):  Why  is  it  that  England  and 
America  show  their  democracy,  their  real  democracy,  so  much  more  than 
countries  in  the  difficult  position  of  Italy,  or  France,  or  Germany?  There 
you  will  find  throughout  the  war,  and  even  now,  the  great  mass  of  taxes 
imposed  upon  the  consumption  of  the  common  man;  whereas  in  England 
and  in  the  United  States  during  the  Great  War,  as  over  against  our 
experiences  in  the  Civil  War,  the  great  majority  of  taxes  are  raised  from 
wealth;  that  is,  from  those  who  can  afford  to  pay,  rather  than  from  the 
consumption  of  the  necessaries  and  comforts  of  life.  .  .  After  the  United 
States,  the  two  countries  of  the  world  which  are  making  the  most  progress 
in  fiscal  reform  are  England  and  Italy — for  Italy  is  doing  better  than 
France.  When  these  two  countries  came  to  consider  this  problem  they 
went  into  the  question  of  a  sales  tax  thoroughly  and  finally  rejected  it. 
On  the  other  hand,  the  two  big  countries  of  the  world  that  have  adopted 
the  sales  tax,  Germany  and  France,  did  so  only  as  a  last  resort,  after 
exhausting  every  other  available  source  of  taxation.  .  .  Germany  was  forced 
to  this  sales  tax  in  the  last  extremity,  and  in  France  the  same  is  true.  .  . 
I  have  been  in  California  for  eight  months,  and  had  the  pleasure  some 
time  ago  of  addressing  a  large  body  of  business  men  in  San  Francisco 
assembled  to  discuss  this  question.  I  found  that  the  situation  was  pre- 
cisely that  which  was  presented  by  our  committee.  Everyone  was  anxious 
to  get  rid  of  the  profits  tax,  everyone  had  heard  that  here  was  a  way  out, 
and  it  captivated  them  all;  every  man  in  that  room  was  in  favor  of  a 
general  sales  tax.  But  after  I  had  talked  with  them,  not  so  much  in 
opposition  as  trying  to  show  that  there  was  another  side  of  the  question 
which  they  must  begin  to  study,  it  was  marvelous  to  see  what  a  change 
came  over  them;  not  because  I  spoke — because  everyone  would  have  done 
just  as  well — but  simply  because  attention  was  now  called  to  some  of  the 
less  obvious  aspects  of  the  case. 

A  sales  tax  on  the  sales  of  capital  would  ruin  New  York  City  as  the 
financial  center  of  the  country.  A  sales  tax  on  the  nrcessaries  of  life 
would  evoke  a  political  struggle  the  like  of  which  we  have  never  seen 
in  this  country  (p.  77). 

The  sales  tax  represents  an  attempt  to  put  an  undue,  an  extravagant 
burden  upon  the  consumer,  instead  of  on  the  producer  or  the  possessor 
of  wealth,  (p.  79). 

Dr.  Seligman  discloses  Messrs.  Kahn,  Bache,  Rothschild, 
and  others  of  like  antecedents  from  the  "aristocracies  of  old" 
favor  a  sales  tax. 

I  will  willingly  leave  my  colleagues  in  Congress  to  say  whose 
advice  is  to  be  considered.  Shall  it  be  that  of  a  man  whose 
judgment  is  not  warped  by  personal  or  pecuniary  interests, 
who  handles  the  subject  with  the  mind  of  a  master,  Seligman, 
whose  opinion  is  supported  by  two  great  tax-investigating  com- 
mittees, by  the  experts  of  the  Treasury,  who  have  spoken 
through  Secretary  Houston,  and  by  a  dozen  reputable  witnesses 
quoted?  Whom  shall  we  follow  in  placing  a  billion-dollar  tax 
on  the  backs  of  the  people?  Shall  we  accept  these  authorities 
or  shall  it  be  the  wabbler  and  waverer  banker  and  broker  with 


196  SELECTED   ARTICLES 

his  New  York  colleague,  who  spends  eleven  months  a  year, 
according  to  his  own  admission,  in  trying  to  dodge  taxes?  There 
can  be  but  one  answer. 

Lest  We  Forget 

A  terrible  war  has  swept  over  the  world,  leaving  sorrow  and 
misery  strewn  everywhere  along  the  trail.  The  struggle  with 
arms  registered  over  a  score  of  million  men  dead,  wounded,  or 
missing,  but  this  was  only  one  item  of  the  losses.  Social,  indus- 
trial, and  governmental  upheavals  have  spread  like  a  prairie  fire 
from  the  war  conflagration. 

In  our  own  land  innumerable  battles  have  been  fought, 
as  bitter  and  lasting  in  effect  as  those  occurring  over  three 
thousand  miles  away.  No  statistics  will  ever  record  the  broken 
homes,  sicknesses,  sacrifices,  and  deaths  that  have  no  place  in 
history's  battles  nor  of  secret  struggles  when  giving  away  mil- 
lions of  their  best  treasures — their  boys.  Nor  will  history  ever 
properly  record  the  taking  of  everything  not  nailed  down 
during  that  war  by  profiteers  who  robbed  the  Government  and 
robbed  the  public  without  limit  or  conscience.  Scars  are  not 
yet  healed,  for  the  people  have  long  memories. 

Fortunes  have  been  amassed  and  laid  away  that  were  wrung 
from  the  necessities  of  our  Nation  and  of  the  people.  That  is 
only  one  chapter  from  the  record,  but  that  is  a  chapter  with 
which  we  are  now  concerned  because  profiteering  and  pilfering 
of  the  public  has  been  a  continuous  performance  whenever  op- 
portunity exists,  and  it  is  brought  forcibly  to  mind  by  the 
proposal  and  powerful  propaganda  to  repeal  the  excess  profits 
law  and  enact  a  general  sales  tax. 

The  Jobless  Will  Equally  Pay  a  Sales  Tax 
•  In  a  report  from  the  Department  of  Labor  of  January  26, 
just  issued,  the  statement  is  made  that  3,473,466  jobs  have  been 
lost  within  the  past  year  and  industry  has  been  reduced  approxi- 
mately 40  per  cent.  In  the  face  of  this  record  Congress  is  now 
asked  to  exempt  from  taxation  those  who  accumulated  enormous 
profits  in  great  corporate  business  and  also  to  slash  deep  the 
surtaxes  of  those  whose  individual  incomes  reach  high  levels. 
According  to  Bache,  who  heads  the  sales-tax  propagandists, 
these  taxes  now  paid  out  of  large  profits  and  high  incomes 
should  be  shifted  on  to  the  three  and  a  half  million  jobless, 
who  with  their  dependents  must  buy  food,  heat,  and  clothes, 


TAXATION  197 

with  an  alternative,  according  to  Bache,  expressed  with  grim 
humor,  "to  merely  refrain  from  consuming"  (p.  58). 

That  advice  is  more  cruel  than  Marie  Antoinette's,  "If  they 
can't  get  bread,  why  not  eat  cake?"  Bache  has  many  disciples 
in  this  country  and  in  the  world  today,  but  only  the  blind  fail 
to  see  that  an  autocracy  of  wealth  may  become  the  handmaid 
of  a  military  autocracy  which  the  world  has  temporarily  de- 
stroyed. 

Those  who  try  to  view  conditions  without  bitterness  or  preju- 
dice find  the  greatest  danger  to  our  body  politic  today  lies  in 
the  ruthless  crushing  of  the  individual,  the  cupidity  and  selfish- 
ness of  men,  and  a  modern-day  arrogance  of  wealth,  that  in  turn 
demands  its  protection  from  those  whom  it  crushes. 

In  this  day  of  world-wide  commercial  struggles,  when  the 
individual  becomes  swallowed  up  in  the  maelstrom,  it  is  well 
to  remember  that  under  our  form  of  government  the  humblest 
and  poorest  is  entitled  to  equal  rights  of  life,  liberty,  and  the 
pursuit  of  happiness,  unless  it  is  to  become  a  lost  paragraph 
from  our  Constitution,  and  that  next  to  liberty  the  most  fre- 
quent cause  for  historic  struggles  has  come  from  unjust  taxa- 
tion, with  its  accompanying  oppression. 

Other  Tax  Issues  Not  Discussed 

I  have  presented  what  I  believe  to  be  facts  and  authorities 
that  effectually  discredit  the  present  effort  to  saddle  a  turnover 
sales  tax  on  the  people  of  this  country.  One  of  the  greatest 
campaigns  for  the  tax  is  now  being  waged  in  Washington  and 
throughout  the  country.  The  stakes  are  higher  than  with  any 
legislative  program  in  recent  years  because  the  plan  proposes 
to  shift  the  $800,000,000  to  $1,000,000,000  in  annual  excess  profits 
taxes  over  onto  the  under  fellow. 

Money  is  plentifully  supplied  to  press  this  propaganda  upon 
Congress.  Every  man  who  pays  excess  profits  taxes  in  Con- 
gress will  be  pressed  to  join  the  movement,  irrespective  of  eco- 
nomic, governmental,  or  political  results.  I  have  not  sought  to 
discuss  the  repeal  of  excess  profits  taxes  nor  the  proper  limit 
to  place  on  personal  income  surtaxes.  Nor  have  I  assumed  to 
discuss  a  constitutional  amendment  that  will  reach  the  hoarded 
wealth  of  Jules  Semon  Bache  and  others  who  invest  their 
wealth  in  tax-exempt  securities. 

I  have  not  presented  the  alternative  of  taxing  capital  now 


198  SELECTED    ARTICLES 

being  pressed  in  other  countries,  notably  England,  and  by  large 
farming  organizations  and  some  labor  organizations  in  our  own 
country,  nor  have  I  dwelt  on  the  fact  that  while  England  re- 
fuses to  give  up  her  excess  profits  tax  and  rejects  a  sales  tax 
without  any  consideration,  special  interests  most  concerned  here, 
following  the  example  of  the  railway  bill  propaganda  of  last 
year,  are  straining  every  nerve  to  do  here  what  England  dare 
not  do  across  the  water,  and  I  use  the  term  "dare  not"  ad- 
visedly when  referring  to  a  turnover  sales  tax. 

The  Price  Is  Too  Great  to  Pay 

I  have  not  discussed  the  political  liability  of  a  turnover  con- 
sumption tax,  nor  have  I  indulged  in  useless  predictions  of  what 
reward  will  be  measured  out  to  Representatives  who  listen  to 
the  siren  song  of  the  propagandists  and  fail  to  represent  those 
back  home  those  who  will  be  called  on  to  pay  the  bill — a  billion- 
dollar  tax  bill — in  addition  to  other  taxes,  local  and  Federal. 
These  are  all  fruitful  fields  for  discussion  and  may  be  covered 
before  any  turnover  consumption  tax  is  passed  by  Congress.  I 
have  tried  to  place  before  you  the  judgment  of  recognized  ex- 
perts, expressed  both  individually  and  through  united  action, 
all  of  whom  condemn  the  passage  of  a  general  sales  tax  in  this 
country  in  time  of  peace.  Their  views  have  not  been  given  to 
Congress  in  any  public  hearings  to  my  knowledge,  although 
sales  tax  advocates  led  by  an  amateur  expert  who  wabbles  and 
wavers  have  been  given  full  hearings  by  our  committee  with 
accompanying  wide  publicity  through  the  press. 

To  my  own  mind  the  time  is  one  of  great  concern.  The 
future  does  not  rest  alone  on  the  resumption  of  business  but 
also  on  the  willingness  of  men  of  large  means  to  shoulder  their 
full  share  of  governmental  and  tax  burdens.  Temporary  suc- 
cess of  any  Sales  tax  measure  will  occasion  loss  of  respect  for 
property  and  of  those  who  succeed. 

The  price  is  too  great  and  one  that  even  those  drunk  with 
power  may  well  hesitate  to  pay. 

BRIEF  EXCERPTS 


Any  tax  on  what  men  have  is  better  than  a  tax  on  what  men 
2d.     Tc 
30,  1894. 


need.     Tom  L.  Johnson.  Congressional  Record.  26:1652  January 


TAXATION  199 

The  [sales]  tax,  if  shifted  to  the  consumer,  violates  the 
fundamental  law  of  equality  of  taxation.  Edwin  R.  A.  Seligman. 
Proceedings  of  the  Second  National  Industrial  Tax  Conference, 
p.  74. 

We  collected  in  the  last  fiscal  year  something  over 
$1,000,000,000  from  consumption  taxes,  as  I  interpret  the  term 
"consumption  taxes."  That  constituted  about  2  per  cent  of  the 
total  internal  tax  budget.  I  think  that  it  would  be  wrong  to 
double  that  percentage.  Thomas  S.  Adams.  Proceedings  Second 
National  Industrial  Tax  Conference,  p.  Hi. 

No  man  that  ever  had  anything  to  do  with  the  marketing  of 
farm  products,  whether  as  producer,  seller,  or  buyer,  would 
claim  that  the  farmer  could  pass  this  tax  on  to  the  purchaser. 
The  price  of  wheat  is  fixed  usually  by  the  Liverpool  market. 
Liverpool  will  pay  this  price  and  no  more,  whether  there  is  or 
is  not  a  tax  on  the  sale  by  the  farmer.  The  price  of  corn  is 
determined  by  the  Chicago  market.  The  corn  grower  is  offered 
so  much  for  his  corn  at  the  elevator.  Of  course,  he  can  not  pass 
that  on.  He  will  have  to  pay  it.  William  R.  Green.  Hearings 
before  the  Committee  on  Ways  and  Means.  1921.  p.  86. 

Regarding  the  effects  [of  the  sales  tax]  upon  business,  the 
testimony  of  a  distinguished  French  scholar  is  worth  citing. 
Gaston  Jeze  writes :  "The  tax  is  essentially  a  tax  upon  expendi- 
tures— the  worst  kind  of  tax  for  both  producers  and  consumers 
At  this  very  time  it  tends  to  increase  the  price  in  a  formidable 
manner;  in  consequence,  it  helps  to  restrain  consumption;  it 
helps  to  close  channels  of  sales  at  the  moment  when  it  is  neces- 
sary to  open  new  ones.  In  my  opinion,  the  tax  upon  sales  prices 
is  responsible  in  large  measure  for  the  economic  crisis  which 
has  now  begun  and  bids  fair  to  be  long  and  terrible."  Nation. 
112:683  May  n,  1921. 

The  Wall  Street  Journal  gives  the  following  facts  <about  the 
French  turnover  tax: 

While  estimated  to  produce  as  much  as  460,000,000  francs  in 
a  month,  the  highest  actual  month's  revenue  from  this  source 
is  234,000,000  francs  in  September,  while  the  lowest  is  recorded 
for  March,  147,000,000  francs,  against  the  estimated  415,000,000 


200  SELECTED   ARTICLES 

francs.  In  the  concluding  five  months  of  last  year,  the  tax  hav- 
ing only  come  into  practical  operation  last  August,  the  yield 
was  less  than  1,000,000,000  francs  instead  of  the  expected 
2,000,000,000.  Moreover,  during  the  eight  months  of  its  opera- 
tion the  yield  has  consistently  declined.  Literary  Digest.  69:70 
May  7,  1921. 

The  principal  defect  [of  the  sales  tax]  lies  in  the  premium 
that  such  a  tax  would  place  upon  synthesized  business.  The 
small  business  which  confined  itself  to  one  branch  of  manufac- 
ture or  sale  and  bought  its  stock  from  an  independent  business 
concern  would  be  forced  to  charge  higher  prices  than  the  large 
trust,  which  produced  or  mined  its  raw  materials,  transported 
them  in  its  own  ships  to  its  factories,  and  finally  sold  the  finished 
product  through  its  own  distributive  agencies.  And  if  we  at- 
tempt to  meet  this  fundamental  objection  by  confining  the  tax 
to  articles  sold  for  "consumption  and  use,"  we  meet  an  almost 
insoluble  problem  of  classification.  Thomas  S.  Adams.  Proceed- 
ings Twelfth  Annual  Conference  National  Tax  Association. 
P.  312. 


It  needs  no  argument  to  show  that  the  standard  of  consump- 
tion inequitably  distributes  the  burden.  The  millionaire,  with 
his  income  of  $50,000  a  year,  cannot  eat  or  wear  a  hundred  times 
as  much  as  the  day  laborer  with  his  income  of  $500  a  year. 
Nor  in  the  ordinary  course  of  events  does  he  spend  a  hundred 
times  as  much  on  travel,  horses,  furniture,  or  any  of  the  other 
luxuries  of  life.  Taking  the  country  through,  it  is  safe  to  say 
that  expenditure  does  not  increase  in  proportion  to  property  or 
income.  The  conclusion  is  inevitable  that  the  poorer  a  man  is, 
the  larger  his  proportionate  share  of  the  burden  of  taxation  ; 
whereas,  if  there  were  to  be  any  inequality  whatever,  the  richer 
a  man,  the  larger  relatively  should  be  his  share.  Robert  Luce. 
Public  Opinion.  13:51  April  23,  1892. 

To  those  who  are  not  unacquainted  with  the  ways  of  finan- 
cial interests,  the  mere  fact  that  the  proposition  [the  increase  of 
the  rate  of  sales  tax]  emanates  from  their  councils  is  enough  to 
provoke  suspicion,  and  when  it  is  affirmed  that  the  tax  is  "passed 
along  in  small  fractions  and  is  finally  paid  by  the  consumer, 
practically  without  his  knowledge,  and  the  additions  are  so  trif- 


TAXATION  201 

ling  as  not  materially  to  affect  prices,"  that  such  a  tax  would 
raise  more  revenue  than  the  country  actually  needs,  and  that  its 
adoption  would  lead  to  repeal  of  the  excess  profits  tax  and  the 
income  tax,  one  begins  to  detect  the  "nigger  in  the  wood-pile." 
It  takes  a  wizard  of  finance  to  maintain  that  some  $500,000,000 
a  year  can  be  painlessly  extracted  from  the  people  of  Canada. 
Winnipeg  Grain  Growers'  Guide. 

An  effort  is  being  made  by  those  who  represent  "Big  Busi- 
ness" to  shift  the  burden  of  taxes  from  the  profiteers  to  the 
masses.  First,  they  demand  the  repeal  of  the  excess  profits  tax 
and  the  substitution  of  other  taxes  that  burden  all.  The  excess 
profits  tax  is  the  most  just  tax  there  is — it  is  collected  from 
those  who  collect  excess  profits — that  is,  larger  profits  than  they 
should.  It  is  the  only  tax  that  a  taxpayer  can  avoid  by  his  own 
act — let  him  stop  stealing  and  he  will  not  have  to  divide  with 
the  government.  And  yet  this  is  the  one  tax  that  the  reaction- 
aries want  repealed.  The  next  demand  is  for  the  lowering  of 
taxes  on  big  income  and  an  increase  in  the  rate  on  smaller  in- 
comes— as  bold  a  piece  of  piracy  as  was  ever  proposed.  William 
J.  Bryan,  Commoner.  21:1  August,  1921. 

Those  who  defend  the  equity  of  the  sales  tax  tinder  the  as- 
sumption that  it  will  be  completely  shifted,  must  attempt  to  dem- 
onstrate that  the  gross  expenditure  is  a  more  exact  and  satis- 
factory standard  of  ability  to  pay  than  net  income.  This  is  a 
hopeless  task.  A  standard  of  gross  expenditure  would  relieve 
savings  from  all  taxes.  Our  greatest  savers  are  the  richest 
classes.  But  not  only  would  the  sales  tax  apply  to  a  much  larger* 
share  of  the  small  man's  income  than  of  the  rich  man's,  but  the 
tax  would  also  fall  just  as  heavily  on  the  small  man's  dollar  as 
on  the  rich  man's.  This  will  not  appeal  strongly  to  those  who 
believe  in  the  equity  of  progressive  taxation.  Indeed,  the  sales 
"tax  is  grossly  unfair  to  the  poor  man,  and  should  be  dropped  for 
that  reason  alone.  Nation.  112:683  May  n,  1921. 

The  sales  tax,  in  any  form  proposed,  whether  a  turnover 
tax  or  a  tax  on  retail  sales  only,  violates  the  cardinal  principle 
of  ability  to  pay.  The  tax  would  be  paid  by  the  bankrupt  a£ 
well  as  by  the  individual  or  corporation  with  a  net  income. 
Such  a  tax  would  retard  the  movement  of  stocks  put  in  at 


202  SELECTED   ARTICLES 

higher  prices,  and  hence  is  peculiarly  unfitted  to  the  present 
industrial  situation.  It  would  be  unjust  as  between  competitors 
in  the  same  industry  depending  on  the  degree  of  integration 
in  the  various  industries.  It  would  be  particularly  odious  and 
heavy  in  those  industries  where  the  turnover  would  be  rapid  in 
proportion  to  capital  invested.  More  important  still,  it  is  an 
indirect  tax,  to  a  certain  extent,  and  if  adopted  would  abide 
with  us  to  an  extent  that  a  direct  tax  would  not.  The  direct 
tax  has  the  distinct  advantage  of  making  those  who  pay  it 
watchful  of  governmental  expenditures  and  governmental  effici- 
ency. Clyde  L.  King.  Annals  of  the  American  Academy  97:72. 
Sept.  1921. 

Further  consideration  of  the  subject  has  convinced  me  that 
a  general  sales  or  turnover  tax  is  altogether  inexpedient.  It 
would  apply  not  only  to  the  absolute  necessities  of  life — the  food 
and  clothing  of  the  very  poor— but  it  would  similarly  raise  the 
prices  of  the  materials  and  equipment  used  in  agriculture  and 
manufactures.  It  would  confer,  in  effect,  a  substantial  bounty 
upon  large  corporate  combinations  and  trusts  and  place  at  corre- 
sponding disadvantage  the  smaller  or  disassociated  industries 
which  carry  on  separately  the  business  operations  that  in  many 
combinations  and  trusts  are  united  under  one  ownership.  The 
group  of  independent  producers  would  pay  several  taxes,  the 
combination  only  one  tax.  Finally,  it  would  add  a  heavy  ad- 
ministrative load  to  the  Bureau  of  Internal  Revenue  which — 
burdened  as  it  is  with  the  responsibility  of  enforcing  the  child- 
labor  tax  law,  the  national  prohibition  act,  the  narcotic-drug 
law,  the  adulterated  butter  and  mixed-flour  tax  laws — is  already 
near  the  limit  of  its  capacity.  Secretary  David  F.  Houston.  Re- 
view of  Reviews. 

It  cannot  be  questioned  that  ability  to  pay  is  the  only  just 
and  practicable  basis  for  the  apportionment  of  taxes,  or  that 
this  ability  increases  with  increasing  income  at  a  rate  more  rapid 
than  the  increase  of  the  income  itself.  Nor  can  it  be  doubted 
that,  although  a  social  reform  cannot  be  effected  through  any 
conceivable  use  of  taxing  machinery,  yet  the  conditions  under 
which  a  more  healthful  social  evolution  can  take  place  than  is 
observed  at  the  present  time  may  result  from  the  manner  in 
which  the  taxing  machinery  is  employed.  This,  as  well  as  the 
idea  of  equity,  induces  the  mind  to  consent  to  the  principle  of 


TAXATION  203 

progression.  It  may  further  be  conceded  that  the  fear  enter- 
tained by  English  economists  lest  the  accumulation  of  capital 
and  the  development  of  industry  should  be  arrested  by  progres- 
sive taxation  is  not  warranted  by  the  facts  in  the  case;  but,  on 
the  other  hand,  that  the  principle  of  progression  judiciously  ap- 
plied will  tend  to  invite  experimentation  and  give  an  opportunity 
to  energy  under  conditions  likely  to  be  the  most  conducive  to 
industrial  and  social  development.  Each  of  these  arguments 
considered  by  itself  seems  to  warrant  confidence  in  the  theory 
of  progressive  taxation.  Henry  C.  Adams.  The  Science  of  Fi- 
nance, p.  352. 

A  still  more  important  objection  to  indirect  taxation  is  that 
when  imposed  on.  articles  of  general  use  (and  it  is  only  from 
such  articles  that  large  revenues  can  be  had)  it  bears  with  far 
greater  weight  on  the  poor  than  on  the  rich.  Since  such  taxa- 
tion falls  on  people  not  according  to  what  they  have,  but  accord- 
ing to  what  they  consume,  it  is  heaviest  on  those  whose  con- 
sumption is  largest  in  proportion  to  their  means.  As  much  sugar 
is  needed  to  sweeten  a  cup  of  tea  for  a  working  girl  as  for  the 
richest  lady  in  the  land,  but  the  proportion  of  their  means  which 
a  tax  on  sugar  compels  each  to  contribute  to  the  government  is 
in  the  case  of  the  one  much  greater  than  in  the  case  of  the  other. 
So  it  is  with  all  taxes  that  increase  the  cost  of  articles  of  general 
consumption.  They  bear  far  more  heavily  on  married  men  than 
on  bachelors;  on  those  who  have  children  than  on  those  who 
have  none;  on  those  barely  able  to  support  their  families 
than  on  those  whose  incomes  leave  them  a  large  surplus.  If  the 
millionaire  chooses  to  live  closely  he  need  pay  no  more  of  these 
indirect  taxes  than  the  mechanic.  I  have  known  at  lea*t  two 
millionaires — possessed  not  of  one,  but  of  from  six  to  ten 
millions  each — who  paid  little  more  of  such  taxes  than  ordinary 
day  laborers.  Henry  George,  Protection  or  Free  Trade,  />.  78-9. 

Ought  what  a  person  consumes  to  determine  the  portion  that 
he  should  contribute  to  the  support  of  the  government?  This 
theory,  which  is  one  of  the  oldest  in  economic  history,  an  able 
writer  states  as  follows :  "Every  man  ought  to  be  taxed  on  all 
that  property  which  he  consumes  or  appropriates  to  his  exclusive 
use."  In  opposition  to  this  view  it  may  be  said,  in  the  first  place, 
that  it  is  economically  impossible  for  the  government  to  take 


204  SELECTED   ARTICLES 

anything  for  its  support  from  a  man  who  does  not  earn  the 
bare  necessities  of  life.  To  attempt  to  do  so  would  result  only 
in  failure.  For  what  the  State  took  away  from  such  a  man  with 
one  hand  as  a  taxpayer  it  must  return  to  him  with  the  other  as 
a  pauper. 

In  the  second  place,  on  what  ethical  ground  should  we  ex- 
empt men  from  paying  a  tax  on  that  portion  of  their  wealth 
that  they  do  not  consume?  It  is  from  what  they  have  left  after 
supplying  the  necessities  of  life  that  they  are  most  able  to  con- 
tribute to  the  expenses  of  the  government.  The  first  maxim  of 
a  just  system  of  taxation,  that  a  person  should  contribute  to  the 
public  revenue  according  to  his  ability,  is  plainly  violated  by  such 
an  exemption.  The  man  with  millions  and  few  personal  ex- 
penses might  often  by  this  arrangement  contribute  less  to  the 
support  of  the  government  than  a  day  laborer  with  a  large  fam- 
ily who  possessed  almost  nothing. 

It  can  hardly  be  doubted  that  our  national  taxes  upon  salt, 
coal,  clothing,  and  the  materials  used  in  the  construction  of 
dwellings,  violate  the  very  first  principles  of  justice  and  eco- 
nomics. They  enhance  the  cost  of  mere  subsistence,  and  any 
act  of  the  government  that  does  that  is  oppressive  and  unjust. 
They  are  as  another  expresses  it,  "a  veiled  or  disguised  tax  on 
the  wages  of  labor,"  and  pre-eminently  injurious  to  the  welfare 
of  the  very  classes  they  profess  to  benefit.  Just  as  the  property 
system  of  taxation  oppresses  the  farmer  and  compels  him  to 
contribute  far  more  than  his  due  share  to  the  public  revenues, 
so  the  expenditure  system,  or  a  tax  on  consumption,  oppresses 
the  working  classes,  obliging  them  to  pay  not  only  their  own 
taxes  but  a  large  proportion  of  the  taxes  of  others.  Frank  S. 
Hoffman.  The  Sphere  of  the  State,  p.  120-1. 


PART  III 
THE  STATE  INCOME  TAX 


BRIEF 

RESOLVED:  That  this  state  should  adopt  a  state  income  tax,  sim- 
ilar to  that  in  vogue  in  Wisconsin  or  New  York. 


AFFIRMATIVE 
INTRODUCTION  : 

A.  Meaning  of  the  question. 

1.  The  income  tax  as  a  state  measure. 

2.  The  revenue  may  be  partly  or  largely  returned  to 
the  cities  and  other  local  governments. 

B.  Importance  of  the  question. 

I.     Our   state    and    local    governments    are    in    need   of    more 
revenue. 

A.  Modern  progress  requires  that  they  have  much  more 
funds. 

1.  To   build   and    maintain    good    roads    which   have 
now  become  a  necessity. 

2.  To  build,  equip  and  operate  good  modern  schools, 
in  the  rural  districts  and  small  towns,  as  well  as 
in  the  larger  cities. 

3.  To  provide  proper  public  health  service. 

4.  To    provide    adequate    play    ground    facilities    for 
the  children  and  recreation  facilities  for  adults. 

5.  To  pay  adequate  salaries  to  public  school  teachers. 

B.  In  many  states  the  cities  are  in  dire  need. 

1.  The    schools    in    New   York    City   have   been   en- 
\       dangered. 

2.  Several  of  the  cities  in  Ohio  have  been  compelled 
to  borrow  money  to  meet  current  operating  ex- 
penses,  short  time   notes   being   issued   that   were 
in  some  cases  later  refunded  into   long  time  in- 
terest-bearing bonds. 

II.     Other  forms  of  taxation  have  failed  to  yield  the  necessary 
revenue  or  are  unsuited  to  the  purpose. 


208  SELECTED  ARTICLES 

A.    The    general    property    tax    is    everywhere    an    un- 
questioned failure. 

1.  Much  personal  property,  often  two-thirds  of  it,  is 
not  even  listed  for  taxation. 

a.  This  punishes  honesty  and  rewards  dishonesty. 

b.  It  puts  an  unjust  and  unfair  burden  upon  the 
owners  of  real  estate  and  other  tangible  prop- 
erty. 

2.  Most  property  is  greatly  undervalued  for  the  pur- 
pose of  taxation,  often  as  low  as  one-third  of  its 
true  value. 

a.  This  is  very  unfair  and  unjust,  because  some 
forms  of  property  are  assessed  at  their  full 
value,  while  others  are  lower  than  the  average 
basis. 

(1)  The  property  of  widows  and  orphans  is 

assessed  at  its  full  value. 

(2)  The    property    of    large    corporations    is 
assessed  far  lower  than  the  homes  of  the 
poorer  people. 

3.  It  is  easily  evaded  by  the  richer  people  and  the 
great  corporations. 

a.  Tax-dodgers   often   have   their   residence   just 
outside  of  a  large  city  or  just  across  a  state 
line. 

b.  People  determined  to  evade  their  honest  share 
of  taxation  will  often  organize  a  suburban  city 
or  village  and  resist  annexation,  so  as  to  have 
all  the  benefits  of  a  great  city  without, helping 
to  pay  for  them.     Almost  every  large  city  in 
America  has   one  or  more  of  these  "satellite 
and  parasite"  communities.    Sometimes  the  city 
has  grown  and  completely  surrounded  the  tax- 
dodgers'  nest. 

c.  Large     corporations     will     often     have     their 
"main"  office  in  some  small  town  where  taxes 
are  low,  or  where  they  can  control  the  officials. 

d.  The  property  of  the  poor  is  of  such  kind  as  is 
.    difficult    to    conceal    or   undervalue,    while    the 

opposite  is  true  of  the  property  of   the  rich. 


TAXATION  209 

4.  It  often  results  in  double  taxation. 

a.  In  some  states  land  worth  $10,000  is  taxed  at 
its  full  value,  and  a  mortgage  of  $5,000  is 
taxed  at  its  face  value. 

5.  It  taxes  all  property  at  the  same  rate,  which  is  un- 
fair and  unjust. 

a.    All  property  is  not  equally  productive. 

B.  Corporation  taxes  cannot  be  raised  in  most  states. 

1.  Corporations  pay  taxes  upon  their  property  under 
the  general  property  tax. 

2.  In  most  states  they  are  called  upon  to  pay  special 
taxes,    such    as    fees,    licenses,    franchise    taxes, 
capital  stock  taxes  or  some  similar  special  tax. 

C.  The   federal  government   has   enacted   an   inheritance 
tax. 

1.  The  federal  tax  sums  up  to  25  per  cent. 

2.  Any  additional  tax  would  be  an  unfair  and  unjust 
burden. 

D.  The  poll  tax  is  unjust  and  unprofitable. 

III.    A  state  income  tax,  similar  to  the  one  adopted  in  Wiscon- 
sin or  New  York,  is  desirable. 

A.  It  is  certain  in  its  yield. 

B.  It  is  just  and  equitable — it  taxes  people  in  proportion 
to  their  ability  to  pay. 

C.  It  is  easy  to  collect. 

D.  It  is  difficult  to  evade. 

E.  It  is  impossible  to  shift  it. 

.IV.    A  state  income  tax  is  practicable. 

A.  '  It  has  been  successfully  employed  in  many  places. 

1.  It  has  been  long  used  in  several  other  countries. 

2.  It  has  been  employed  in  many  states  of  our  union. 

3.  It  has  recently  been  remarkably  successful  in  Wis- 
consin, Massachusetts,  New  York,  and  some  other 
states. 

B.  A  state  income  tax  does  not  interfere  with  the  fed- 
eral income  tax. 

1.  None  of  the  thirteen  states  that  have  a  state  in- 
come tax  have  noticed  any  difficulty  or  interfer- 
ence because  of  the  federal  tax. 

2.  All  taxes  must  be  paid  out  of  income. 


210  SELECTED   ARTICLES 

3.  The  federal  government  now  cooperates  with  the 
states  to  decrease  the  cost  of  collection  and  pre- 
vent evasion. 


NEGATIVE 
INTRODUCTION  : 

A.  The  negative  does  not  deny  the  merits  of  the  income 
tax  as  a  federal  measure,  but  we  do  deny  that  any 
success  of  the  income  tax  as  a  federal  measure  will 
prove  it  would  be  equally  successful  as  a  state  system. 

B.  We  must  judge  its  worth  by  its  history  in  the  different 
states  as  a  state  measure. 

I.    The  income  tax  is  a  source  of  revenue  that  should  be  left 
to  the  federal  government. 

A.  Our  entire  scheme  of  taxation  must  be  readjusted  to 
meet  the  conditions  that  the  World  War  has  produced. 

1.  The  federal  government  is  now  in  dire  need  of 
more  revenue. 

2.  For  several  generations  to  come  the  national  war 
debt  will  require  greatly  increased  income  for  the 
federal  government. 

B.  There   should   be   complete   cooperation   and   harmony 
between  the  states  and  the  federal  government  in  the 
matter  of  taxation. 

I.     No  state  can  be  justified  in  taking  a  course  that 
will  annoy  or  embarrass  the  national  government. 

C.  Nation-wide  uniformity  in  the  rate  of  income  taxation 
is  best. 

1.  It  will  decrease  the  uncertainty  which  is  a  serious 
interference  with  industry. 

2.  It  will  prevent  duplication  of  the  tax  machinery. 

II.    State  income  taxes  have  many  objectionable  features  and 
results. 

A.    A    state   income   tax   is   easily   evaded   by   the    richer 
people. 

1.  A  person  can  take  up  a  residence  across  a  state 
line. 

2.  Corporations   can   reincorporate   in   another   state. 


TAXATION  211 

3.     No  state  can  compel  a  corporation,  incorporated  in 
another    State    though    doing    business    within    its 
limits,  to  reveal  the  stock  or  bond  holdings  or  the 
dividends  received,  by  one  of  its  own  citizens, 
a.     It  is  therefore  impossible  for  a  state  to  employ 
the    principle    of    stoppage    at    source    in    col- 
lecting its  state  income  tax. 

B.  It  puts  a  premium  upon  falsehood  and  evasion,  which 
has  the  effect  of  a  handicap  upon  honesty. 

1.  In   the   keen   competition   of   the   business   world, 
the  rascals  are  helped  to  survive  by  state  income 
taxes. 

C.  It  is  particularly  unwise  for  any  state  to  tax  the  citi- 
zens of  other  states,  as  is  done  by  the  income  tax  law 
of  New  York  and  several  other  states.  * 

T.  It  has  always  been  the  law  that  personal  property 
shall  be  taxed  according  to  the  domicile  of  the 
owner. 

2.  It   violates   the   principle   of   no   taxation  without 
representation. 

3.  It   creates   and    develops    bad    feeling   among   the 
states  and  will  lead  inevitably  to  retaliatory  mea- 
sures. 

4.  If  all  states  adopt  this  provision,  it  will  mean  uni- 
versal  double   taxation,   with   frequent   triple   and 
quadruple  taxation. 

III.    The  income  tax  is  impracticable  as  a  state  measure. 

A.  The   experience   of    our   states   with   the   income    tax 
shows  that  it  has  failed  in  most  of  the  cases  where  it 
has  been  tried. 

1.  It  has  failed  in  all  of  the  states  where  it  has  been 
in  effect  for  any  considerable  number  of  years. 

2.  The  states  in  which  it  is  claimed  to  be  a  great  suc- 
cess are  the  ones  where  it  has  only  recently  been 
adopted. 

B.  What  our  states  and  cities  need  is  not  more  revenue, 
but  more  efficiency,  economy,  and  honesty  in  their  ad- 
ministrative service. 

C.  The  adoption  of  a  state  income  tax  does  not  mean  the 

repeal  of  the  general  property  tax. 


212  SELECTED  ARTICLES 

1.  Wisconsin  in  1919  raised  about  ten  times  as  much 
revenue  from  its  general  property  tax  as  it  did 
from  its  income  tax. 

2.  Most  of  the  state  commissions  that  have  recom- 
mended   the    adoption    of    the    income    tax    have 
stated  that  it  was  to  supplement  the  general  prop- 
erty tax,  not  to  supplant  it. 


BIBLIOGRAPHY 

An  asterisk  (*)  preceding  a  reference  indicates  that  the  article  or 
a  part  of  it  has  been  reprinted  in  this  volume.  A  dagger  (t)  is  used  to 
indicate  a  few  of  the  other  best  references.  The  references  listed  here 
deal  with  the  income  tax  as  a  state  measure.  For  further  references  to 
books  and  articles  on  the  income  tax  in  general,  see  Miss  Phelps's  book 
named  below. 


OTHER  BIBLIOGRAPHIES 

American  Economic  Association,  Publications.    3d  series.    4  :  684. 
N.  '03.    Delos  O.  Kinsman. 

Bulletin  of  the  University  of  Wisconsin ;   serial  no.  329 ;   gen- 
eral series  no.  194.     S.  '09.     7p. 

Holgate,  Josephine.     Select  list  of  works  relating  to  the  income 
tax.     State  Library,  Olympia,  Wash.     1910.     23p. 

Kennan,   Kossouth   K.     Income  taxation:   methods   and   results 
in  various  countries.     Burdick  and  Allen.     1910. 
P-  336-42.     Bibliography  of  books  and   magazine   articles   consulted   and 

cited. 

Meyer,  H.  H.  B.     List  of  recent  references  on  the  income  tax. 
Library  of   Congress.     96p.     1921. 

Phelps,   Edith  M.     Selected  articles  on  the  income  tax.     (De- 
baters' Handbook  Series)   H.  W.  Wilson  Co.     1917. 
p.  IX-XXXIII.   Bibliography. 

Seligman,  Edwin  R.  A.     The  income  tax.     Macmillan.     1914. 
p.  707-31.     Bibliography. 


GENERAL  REFERENCES 

Books  and  Pamphlets 

Beard,    Charles    A.      Readings    in    American    government    and 
politics.     Macmillan.     1910. 

Chap.  31.   p.   590-605.      Taxation  and  finance. 

Black,    Henry   C.     A   treatise   on   the   law   of   income  taxation 
under  the  federal  and  state  laws.     Vernon  Law  Book  Co. 


2i4  SELECTED   ARTICLES 

Bliss,  W.  D.  P.     The  new  encyclopedia  of  social  reform.     Funk 

&  Wagnalls.     1908. 

p.  600-3.     Income  tax. 
Bullock,  Charles  J.     Select  reading  in  public  finance.     Ginn  & 

Co.     1920. 

p.  401-6.  The  income  tax  in  the  American  commonwealths.  Delos  O. 
Kinsman. 

p.  406-22.  The  Wisconsin    income  tax.     Thomas   S.   Adams. 

p.  445-59-  The  separation  of  state  and  local  revenues.  Charles  J. 
Bullock. 

p.  469-90.  The    state    income    tax    and    the   classified    property    tax. 

Bureau  of  the  Census.  Financial  statistics  of  states  1919.  H9p. 
1920. 

California.     Report  of  the  Commission  on  revenue  and  taxation. 

1906.     pamphlet.     296?. 
Civic   Federation   of    Chicago.     Apace   with   progress — the   case 

for  tax  revision.     1916. 
*Civic  Federation  of  Chicago.    Constitutional  Convention  Series, 

study  no.  2 .  Taxation   and  public  finance.    76p.    Ag.   1919. 
Civic  League  of  Cleveland.    Taxation  in  Ohio.     1915.    pamphlet. 

19?. 

Connecticut.  Report  of  the  special  commission  on  the  taxation 
of  corporations.  1913.  pamphlet.  238?. 

Equitable  Trust  Company  of  New  York.  New  York  state  in- 
come tax  on  individuals.  1920.  pamphlet.  49p. 

Fillebrown,  C.  B.     Taxation.     A.  C.  McClurg  &  Co.     1914. 
p.  95-7.      State  income  taxes. 

Indiana.  Second  annual  conference  on  taxation  in  Indiana, 
under  the  auspices  of  the  extension  division  of  the  Indiana 
University  and  the  Indiana  state  tax  association.  1914.  I9ip. 

Leland,  Simeon  E.  Taxation  in  Kentucky.  University  of  Ken- 
tucky. 1920. 

Chap.    6.      The   income   tax. 

McLaughlin,  A.  C.,  and  Hart,  A.  B.     Cyclopedia  of  American 

government.     D.   Appleton  &  Co.     1914. 

Vol.  3.    p.  490-1.     Income  tax. 
National    Tax    Association.     State    and    local    taxation :    second 

national   conference.      1909. 

p.    279-80.      Income    taxation    (in    Ontario). 
National    Tax    Association.      State    and    local    taxation :    third 

national  conference.     1910. 

p.  213-26.      Relations  of  state   and  federal  finance.     Edwin  R.   A.   Selig- 


TAXATION  215 

National    Tax    Association.      State    and    local    taxation :    fourth 

national  conference.     1911. 

p.  122-38.     Discussion  on  state  income   tax. 
National  Tax  Association.    State  and  local  taxation :  fifth  annual 

conference,  addresses  and  proceedings.     1912. 

p.  103-13.      Wisconsin  income  tax  law.    K.    K.   Kennan. 

National  Tax  Association.     State  and  local  taxation :  sixth  an- 
nual   conference,    addresses    and    proceedings.      1913. 
P  321-33.      The  Wisconsin  income  tax.    Nils  P.  Haugen 

National  Tax  Association.     Tenth  annual  conference,  proceed- 
ings.    1917. 
p.  362-84.      The    state     income     tax    and    the    classified     property    tax. 

Charles  J.    Bullock. 

P-  394-7-     Income    taxes    (enacted    during    1916). 

National  Tax  Association.  Eleventh  annual  conference,  pro- 
ceedings. 1918. 

p.  50-5.      Taxation    in    Oklahoma.     Campbell    Russell, 
p.  92-101.      Massachusetts's   first   year    of   the   state    income    tax.     Henry 

H.   Bond. 

p.  244-7.      New   York   income  tax  law. 

National  Tax  Association.    Twelfth  annual  conference,  proceed- 
ings.    1920. 
p.  386-97.      State    income   taxation    with    special    reference    to    the    New 

York  income  tax  law.     Laurence  A.  Tanzer. 

National  Tax  Association.  Thirteenth  annual  conference,  pro- 
ceedings. 1921. 

p.  274-83.      A   model   state   income   tax   act.      Henry   H.   Bond. 

p.  284-301.  Some  aspects  of  the  problem  of  uniform  state  income 
tax  legislation.  Harley  L.  Lutz. 

p.  301-5.      Discussion   of   state   income    taxation.      Mark   Graves. 

p.  306-15.  Domicile  as  the  criterion  of  liability  to  personal  income 
taxation.  Irving  L.  Shaw. 

p.  317-22.      Suggestions    on    state    income    taxation.      Frank    D.    Strader. 

p.  322-9.        Discussion   of  state   income  taxation.     Carl   C.   Plehn   et  al. 

National  Tax  Association.  Preliminary  report  of  the  com- 
mittee appointed  by  the  National  Tax  Association  to  prepare 
a  plan  of  a  model  system  of  state  and  local  taxation.  1918. 
pamphlet.  45p. 

Nelson,  H.  B.  The  Wisconsin  income  tax.  University  of 
Wisconsin.  (Extension  Division.  Commercial  Education 
Series)  191?.  1921. 

New  York.     Annual  report  of  the  state  tax  commission.     J.  B. 
Lyon   Co.     1919. 
p.  81-118.      Status  of  taxation   in   other  states. 

New    York.      Second    state    conference    on    taxation.      Buffalo. 
Jan.  1912.    J.  B.  Lyon  Co. 
p.  455-9-     A   state   corporation   net   income   tax.     Allen   R.   Foote. 


216  SELECTED   ARTICLES 

Phelps,  Edith  M.  Selected  articles  on  the  income  tax.  (De- 
baters' Handbook  Series)  H.  W.  Wilson  Co.  1917. 

Plehn,  Carl  C.  Introduction  to  public  finance.  Macmillan.  1920. 
p.  287-90.  State  income  taxes  in  the  United  States. 

Seligman,  Edwin  R.  A.     The  income  tax.     Macmillan.     1911. 
p.  388-429.      State   income   taxes. 

Wisconsin.     Eighth  biennial  report  of  the  Wisconsin  Tax  Com- 
mission.    1916. 
p.  41-73.     The   income   tax. 

Wisconsin  Legislative  Reference  Library.  Income  tax  laws: 
brief  digest  of  the  laws  of  the  states  of  the  United  States. 
I2p.  typewritten.  1920. 

Periodicals 

American  Economic  Review.  I  :  906-9.  D.  'n.  Wisconsin 
income  tax.  Thomas  S.  Adams. 

American  Economic  Review.  10:66-91.  Mr.  '20.  The  prog- 
ress of  state  income  taxation  since  1911.  Harley  L.  Lutz. 

American  Economic  Review.  10  : 259-71.  Je.  '20.  Fiscal  as- 
pects of  state  income  taxes.  Alzada  Comstock. 

Annals  of  the  American  Academy.  58  :  59-64.  Mr.  '15.  The 
relation  between  federal  and  state  taxation.  James  E.  Boyle. 

Annals  of  the  American  Academy.  58  : 65-76.  Mr.  '15.  The 
Wisconsin  income  tax.  K.  K.  Kennan. 

Annals  of  the  American  Academy.  58  :  77-86.  Mr.  '15.  The 
Wisconsin  income  tax.  Thomas  E.  Lyons. 

Annals  of  the  American  Academy.  58  :  131-9.  Mr.  '15.  Separa- 
tion of  state  and  local  revenues.  Thomas  S.  Adams. 

Bulletin  of  the  National  Tax  Association.  I  :  59-61.  Ap.  '16. 
New  York  state  income  tax.  J.  F.  Zoller. 

Bulletin  of  the  National  Tax  Association.  I  :  125-8.  Je.  '16. 
Massachusetts  income  tax.  Charles  J.  Bullock. 

Bulletin  of  the  National  Tax  Association,  i  :  129-30.  Je.  '16. 
Shall  we  tax  the  non-resident.  Thomas  S.  Adams. 

Bulletin  of  the  National  Tax  Association.  2  : 46.  N.  '16.  Ad- 
ministration of  the  new  Massachusetts  income  tax.  Henry 
H.  Bond. 

Bulletin  of  the  National  Tax  Association.  2  :  158-64.  Mr.  '17. 
Wisconsin  income  tax. 

Bulletin  of  the  National  Tax  Association.  4  :  119-24.  F.  '19. 
The  taxation  of  incomes  under  the  New  Hampshire  constitu- 
tion. Albert  O.  Brown. 


TAXATION  217 

Bulletin  of  the  National  Tax  Association.  5  : 40-50.  N.  '19. 
The  taxation  of  non-residents  in  the  New  York  income  tax. 
Edwin  R.  A.  Seligman; 

Bulletin  of  the  National  Tax  Association.  5  :  73-5.  D.  '19. 
Distribution  of  income  taxes  to  localities.  T.  E.  Lyons. 

Bulletin  of  the  National  Tax  Association.  5  : 244-6.  My.  '20. 
Collection  of  state  income  taxes  from  non-residents.  Walter 
N.  Seligsberg. 

Bulletin  of  the  National  Tax  Association.  6  :  126-8.  Ja.  '21. 
State  income  taxes :  safeguarding  the  yield :  methods  em- 
ployed in  Delaware.  A.  E.  Holcomb. 

Bulletin  of  the  University  of  Washington.  University  Exten- 
sion series  no.  12.  General  series  no.  84.  Ag.  1914.  Tax- 
ation in  Washington;  papers  and  discussions  of  the  state 
tax  conference  at  the  University  of  Washington.  My.  27-9, 
1914. 
p.  235-9.  State  income  taxes.  Charles  J.  Bullock. 

Economic  World,  n.s.  17  :  595.  Ap.  26,  '19.  The  new  income 
tax  law  of  the  state  of  New  York. 

Economic  World,  n.s.  17  :  737.  My.  24,  '19.  The  new  income 
tax  law  of  the  state  of  New  York.  Eugene  M.  Travis. 

Journal  of  Political  Economy.  26  : 952-69.  D.  '18.  The  tax- 
able income  of  the  United  States.  David  Friday. 

Monthly  Bulletin  of  the  Chamber  of  Commerce  of  the  State  of 
New  York.  2  :  21-32.  Je.  '10.  The  personal  property  tax ; 
report  of  the  committee  on  state  and  municipal  taxation. 

National  Municipal  Review.  8  : 202.  Mr.  '19.  Municipal  and 
state  income  taxes. 

North  American  Review.  190  :  615-27.  N.  '09.  The  relations  of 
state  and  federal  finance.  Edwin  R.  A.  Seligman. 

Political  Science  Quarterly.  10:221-47.  Je.  '95.  Income  tax 
in  the  American  colonies  and  states.  Edwin  R.  A.  Seligman. 

Political  Science  Quarterly.  28  : 569-85.  D.  '13.  Significance 
of  the  Wisconsin  income  tax.  Thomas  S.  Adams. 

Quarterly  Journal  of  Economics.  31  :  1-61.  N.  '16.  The  tax- 
ation of  property  and  income  in  Massachusetts.  Charles  J. 
Bullock. 

Survey.  35  :  475-6-  Ja.  22,  '16.  The  toe  of  the  Puritan  stock- 
ing. William  L.  Garrison,  Jr. 


2i8  SELECTED   ARTICLES 


AFFIRMATIVE  REFERENCES 

Books  and  Pamphlets 

California.     Report  of  the  state  tax  commission.     State  Printing 

Office.    1917. 

p.  110-20.      State   income   tax. 
*Ely,    Richard    T.     Outlines    of    economics.     Macmillan.      1919. 

p.  720-3.     Income  taxes. 
-Ely,   Richard  T.,  and   Finley,  John  H.     Taxation  in  American 

states  and  cities.     Thomas  Y.  Crowell  &  Co.     1888. 

p.  287-311.     Taxation  of  incomes. 
Georgia.     Report  of  the  special  tax  commission.     Byrd  Printing 

Co.     1919. 

p.  7-12.     Present   system    a   failure. 
Howe,    Frederic    C.      Wisconsin,   an    experiment   in   democracy. 

Scribners.      1912. 

Chap.    10.    p.    133-9.     Equalizing   the   tax  burdens. 
Louisiana.     Report  af  the  assessment  and  taxation  commission 

to  the  constitutional  convention.     1921. 

*p.    34-47.      The  income   tax. 

Appendix  C.     p.  100-14.    Massachusetts    income    tax. 

Appendix  F.      p.  172-9.     Report   of   the    National   Tax   Association. 

Maryland.     Minority   report  of  the  tax  commission.     1886. 
Massachusetts.     Report  of  the  special  tax  commission.     1910. 
Massachusetts.     Report  of  the  tax  commissioner  for  the  year 

ending  Nov.  30,  1918.     1919. 

p.  22-58.      The  taxation  of  incomes. 
*Michigan.      Report    of    the    board    of    state    tax    commissioners 

and  state  board  of  assessors.    Wynkoop  Hallenbeck  Crawford 

Co.     1920. 

p.  25-46.     Income   tax. 
Mill,  John  Stuart.     Principles  of  political  economy.     1848. 

Book  5.  Chap.  3.  sec.   5.     The  income  tax. 

Minnesota.     Report  of   the   special   tax  commission.     1902. 
Minnesota.     Report  of  the  state  tax  commission.     1912. 

p.  153-64.      State  income  taxation. 
Mississippi.     Joint   report   of   the   senate   and  house   committees 

appointed  at  the  session  of  1916  to  consider  the  state's  reve- 
nue system  and  fiscal  affairs.     Tucker  Printing  House.     1918. 

p.  41-3.     Income  tax. 
Missouri.     First  biennial    report   of   the   state   tax   commission. 

Hugh  Stevens  Co.     1918. 
p.  171-90.     Income  tax  law. 


TAXATION  2i() 

National    Tax    Association.      State    and    local    taxation.      First 

national  conference.     Macmillan.     1908. 

p.  241-     The   taxation   of  incomes.     Charles   L.   Raper. 
National   Tax   Association.     State   and   local   taxation.     Fourth 

national  conference.     191 1. 

p.  87-110.  The  income  tax  as  a  substitute  for  the  property  tax  on 
certain  forms  of  personalty  in  the  state  of  Wisconsin.  Thomas  S.  Adams. 

National  Tax  Association.     Tenth  annual  conference,  proceed- 
ings.    1917. 
p.  64-87.     The  income  tax  as  a  measure  of  relief  for  Indiana.    William 

A.   Rawles. 

National  Tax  Association.  Twelfth  annual  conference,  pro- 
ceedings. 1920. 

p.  435-44.  The  proposed  personal  income  tax.  Preliminary  report 
of  the  committee  appointed  by  the  National  Tax  Association  to  prepare 
a  plan  for  a  model  system  of  state  and  local  taxation. 

Nebraska.     Report  of   the   special   commission  on  revenue  and 
taxation.      Woodruff    Press.      1914. 
P-  39-58.     The   general   property   tax. 
p.  171-7.      Income  taxation. 

*New  York.     Report  of  the  joint  legislative  committee  on  tax- 
ation.    J.  B.  Lyon  Co.     1916. 
p.  31-54.     The  failure  of   the  personal  property  tax. 
p.  55-102.      Failure    of   the    personal   property    tax    in    New   York. 
p.  184-206.      The   income  tax. 

fOhio.  Report  of  the  special  joint  taxation  committee  of  the 
eighty-third  general  assembly.  F.  J.  Heer  Printing  Co.  1919. 
p.  73-80.  The  income  tax. 

f.  87-165.      A   report    on   the    operation   of   state   income   taxes.     Harley 
utz. 

Ohio.     Second  annual  report  of  the  tax  commission.     Springfield 
Pub.  Co.     1912. 
p.  6-7.     Income   might  be   taxed. 

Pennsylvania.     Report  of  the  tax  commission.     1889. 

South  Carolina.  Report  of  the  joint  special  committee  on  reve- 
nue and  taxation.  1921. 

p.  25-46.      Our   tax   system:   the   facts, 
p.  87-97.     The  income  tax. 

Virginia.     Report  of  the  state  tax  board.     1918. 

p.    34-45.     The  taxation  of  incomes. 
Wisconsin.     Fifth  biennial  report  of  the  tax  commission.     1910. 

p.  9- 1 8.         General   property  tax. 
p.  19-27.      Income  tax. 

Wisconsin.     Sixth  biennial  report  of  the  tax  commission.     1912. 

p.  10-23.  General  property  tax;  substitution  of  income  tax  for  per- 
sonal property  tax. 

p.  24-44.     Income  tax. 

p.  45-56.     Proposed   amendments   to   the   income   tax   law. 


p.  48-69.     The  income  tax  as  a  source   of  municipal  revenue.     Thomas 
<..  L\ 


220  SELECTED   ARTICLES 

Wisconsin.  Seventh    biennial    report    of    the    tax    commission. 

1914. 

p.  90-140.  The  income  tax. 

^Wisconsin.  Tenth  biennial  report  of  the  tax  commission.    1920. 

p.  31-47.     Income  tax  legislation  recommended. 
,     p.  48-6 
E.  Lyons. 

Zangerle,  John  A.  Untaxed  wealth  of  Cleveland  and  why:  an 
exposition  of  the  difficulties  of  administering  the  general 
property  tax  laws  of  Ohio  in  Cuyahoga  county.  S.  J.  Monck. 
1918. 

Periodicals 

American  City.  21  :  538-40.  D.  '19.  The  tax  problem  as  seen 
by  a  real  estate  man.  C.  C.  Hieatt. 

Annals  of  the  American  Academy.  58  :  77-86.  Mr.  '15.  The 
Wisconsin  income  tax.  Thomas  E.  Lyons. 

Bulletin  of  the  National  Tax  Association.  4  :  148-52.  Mr.  '19. 
Taxation  of  incomes  in  North  Carolina. 

California  Taxpayers'  Journal.  3  :  12-13.  S.  '19.  Shall  we  have 
an  income  tax?  Clifton  E.  Brooks. 

California  Taxpayers'  Journal.  4  :  2-5.  Ja.  '20.  Report  on  state 
income  tax  systems.  M.  D.  Lack. 

California  Taxpayers'  Journal.  4  : 6-7.  F.  '20.  Revenue  pro- 
posals for  the  state.  Carl  C.  Plehn. 

Minnesota  Municipalities.  5  :  95-104.  Ag.  '20.  The  income  tax 
as  a  source  of  municipal  revenue.  Thomas  E.  Lyons. 

New  York  State  Tax  Bulletin.  4  :  109-41.  Ag.  '19.  The  need 
of  a  state  income  tax.  Laurence  A.  Tanzer. 

Outlook.  122  1254-5.  Je.  ii,  '19.  More  about  the  new  income 
tax  in  New  York.  Frederick  M.  Davenport. 

Political  Science  Quarterly.  34  :  521-45.  N.  '19.  The  New  York- 
income  tax.  Edwin  R.  A.  Seligman. 

Quarterly  Journal  of  Economics.  32  : 525-32.  My.  '18.  The 
operation  of  the  Massachusetts  income  tax.  Charles  J. 
Bullock. 

South  Atlantic  Quarterly.  18  :  289-98.  O.  '19.  The  present  status 
of  tax  reform  in  North  Carolina.  C.  Chilton  Pearson. 


TAXATION  221 


NEGATIVE  REFERENCES 

Books  and  Pamphlets 

California.    Report  of  the  commission  on  revenue  and  taxation. 

1906. 

*Civic  Federation  of  Chicago.  A  summary  of  the  reports  of  spe- 
cial state  tax  commissions.  1907. 

p.  71-4.     The  income  tax. 

Colorado.     Report  of  the  revenue  commission.     1907. 
*Kennan,  Kossouth  K.     Income  taxation.     Burdick  and  Allen. 

1910. 

p.  203-36.      Income  taxes   in   American  colonies   and  states. 
Louisiana.     Report  of  the  assessment  and  taxation  commission 

to  the  constitutional  convention.     1921. 
*P-   55-6o.      Minority   report. 

Maine.    Report  of  the  special  tax  commission.     1890. 
Massachusetts.     Report  of  the  tax  commission.     1897. 
*Minnesota.     Second   biennial    report   of   the   tax   commission. 

1910. 

p.    156-69.     Taxation   of  incomes. 

Minnesota.  Third  biennial  report  of  the  tax  commission.  1912. 
p.  153-64.  State  income  taxation. 

National  Tax  Association.  State  and  local  taxation:  first  na- 
tional conference.  Macmillan.  1908. 

p.  93.     Income    tax     entirely    unsuited     for     state     revenue.       Lawson 
Purdy. 

*p.  445.      State   income  taxes   failures   in   practice.     H.   A.   Millis. 

National  Tax  Association.  State  and  local  taxation:  fifth  an- 
nual conference :  address  and  proceedings.  1912. 

p.    340-1.      Report   of   the   committee    on   practicable   substitutes   for  the 
personal  property  tax. 

*National  Tax  Association.     Proceedings  eleventh  annual  con- 
ference.    1917. 
*p  50-5.     Taxation  in  Oklahoma. 

New  York.    Report  of  the  tax  commission.     1902. 

*New  York.     Report  of  the  special  commission.     1907. 

*New  York.  Minority  report  of  the  joint  legislative  committee 
on  taxation.  1916. 

t  Seligman,  Edwin  R.  A.  The  income  tax.  Macmillan.  1911. 
p.  642-58.  Shall  the  income  tax  be  a  state  or  a  federal  tax? 

Wisconsin.    Report  of  the  tax  commission.     1898. 


222  SELECTED   ARTICLES 

Periodicals 

*American  Economic  Association,  Publications.  3d  series.  4  : 
S53-684-  N.  '03.  The  income  tax  in  the  commonwealths  of  the 
United  States.  Delos  O.  Kinsman. 

Annals  of  the  American  Academy.  58  :  65-76.  Mr.  '15.  Wiscon- 
sin income  tax.  K.  K.  Kennan. 

Blackwood's  Magazine.  178:279-84.  Ag.  '05.  Tyranny  of  the 
income  tax. 

Forum.  17  :  1-13.  Mr.  '94.  Income  tax:  is  it  desirable?  David 
A.  Wells. 

Forum.  19  :  513-20.  Jl.  '95.  Salutary  results  of  the  income  tax 
decision.  George  F.  Edmunds. 

Independent.  73  : 654-6.  S.  19,  '12.  Income  tax.  William  L. 
Phelps. 

Nation.    58  :  24-5.  Ja.  u,  '94.    Graver  evils  of  the  income  tax. 

North  American  Review.  130  :  236-46.  Mr.  '80.  Communism  of 
a  discriminating  income  tax.  David  A.  Wells. 

Public  Opinion.  17  :  335.  Jl.  12,  '94.  Senator  Hill's  objections  to 
the  income  tax. 

Quarterly  Journal  of  Economics.  23 : 296-306.  F.  '09.  The  pres- 
ent period  of  income  tax  activity  in  the  American  states. 
Delos  O.  Kinsman. 

*Saturday  Evening  Post.  184  :  22.  Je.  15,  '12.  Wrong  income 
tax. 


INTRODUCTION 

In  the  best  literature  of  taxation  during  the  last  decade  of 
the  nineteenth  century  and  the  first  decade  of  the  twentieth  cen- 
tury, both  in  the  reports  of  tax  officials  and  tax  commissions  and 
in  the  writings  of  the  recognized  authorities  on  taxation,  the 
preponderance  of  opinion  was  strongly  against  the  income  tax 
as  a  state  measure.  At  the  beginning  of  the  third  decade  of  the 
twentieth  century  the  majority  of  the  best  that  was  said  and 
written  on  the  subject  was  in  favor  of  such  a  tax.  Moreover, 
several  of  the  ablest  authorities  on  taxation  were  opposed  to  the 
state  income  tax  twenty  years  ago  while  the  very  same  men 
are  in  favor  of  it  now.  Newspaper  editorials  and  magazine  ar- 
ticles have,  for  the  most,  followed  and  accepted  this  marked 
change  in  public  opinion. 

There  are  two  reasons  for  this  complete  change  of  attitude 
toward  the  state  income  tax:  first,  that  no  state  had  made  a 
real  success  of  its  income  tax  until  1911  when  Wisconsin  enacted 
the  first  efficient  law  of  the  kind;  and  second,  that  the  recent 
and  constantly  increasing  need  of  the  state  and  local  govern- 
ments for  more  revenue  has  made  legislatures  seek  new  forms 
of  taxation. 

The  state  income  tax  is  not  a  new  and  untried  thing.  Back 
in  the  colonial  days,  as  early  as  the  middle  of  the  seventeenth 
century  there  were  faculty  taxes.  The  authorities  are  divided  as 
to  whether  these  faculty  taxes  were  income  taxes  or  not.  Since 
the  adoption  of  the  federal  constitution  about  one-half  of  the 
states  have  had  an  income  tax  at  one  time  or  another.  At  the 
present  time  about  one-fourth  of  the  states  have  such  a  tax. 
Several  of  these  have  adopted  it  within  the  last  few  years,  that 
is,  since  the  Wisconsin  tax  was  adopted.  In  several  other  states 
there  has  been  strong  agitation  for  its  adoption. 

The  earlier  state  income  taxes  were  unquestioned  failures, 
due  to  inefficient  administration.  In  several  of  the  states  the 
older  income  tax  is  still  in  vogue,  and  is  still  a  complete  failure. 
In  Wisconsin,  Massachusetts,  New  York  and  some  other  states 


224  SELECTED  ARTICLES 

where  the  newer  ideas  have  been  employed,   the  state  income 
tax  is  an  unquestioned  success. 

That  the  general  property  tax  is  everywhere  a  failure  is  the 
almost  unanimous  testimony  of  all  who  have  written  upon  the 
subject.  It  is  unfair,  unjust,  easily  evaded,  burdensome,  and  not 
sufficiently  productive.  At  the  same  time  the  need  for  more 
revenue  is  constantly  growing.  States,  cities,  villages,  towns, 
counties,  and  townships  all  over  the  country  find  their  expenses 
growing  at  a  rapid  rate  and  their  needs  growing  even  faster. 
Modern  progress  makes  each  community  demand  more  of  its 
, local  government.  Better  roads,  better  schools,  reasonable  sala- 
ries for  teachers  and  others,  adequate  public  health  service,  play- 
grounds, food  inspection,  and  many  other  similar  services  are 
things  which  the  citizens  of  every  community  are  now  demand- 
ing of  their  local  governments.  To  get  the  funds  to  do  these 
things  is  a  serious  problem.  It  is  under  these  conditions  that 
officials  and  scholars  are  turning  to  the  state  income  tax. 


GENERAL  DISCUSSION 

THE  FAILURE  OF  THE  PERSONAL  PROPERTY 

TAX1 

History  of  Tax  in  Europe 

We  would  like,  did  space  permit,  to  trace  the  history  of  the 
personal  property  tax  from  mediaeval  times  down  to  the  present 
day;  to  show  how  it  was  once  in  use  in  practically  every  country 
in  Europe ;  how,  as  the  earlier  and  simple  economic  structure 
gave  way  to  modern  complex  development,  its  weakness  and  de- 
fects became  apparent,  so  that  one  by  one  these  countries 
abandoned  it  until  today  Switzerland  is  the  only  country  in 
Europe  where  the  general  property  tax  still  remains.  We  can- 
not do  better  in  this  connection  than  to  quote  briefly  from  Selig- 
man's  Essays  on  Taxation,  page  61 : 

Historically,  the  property  tax  was  once  well-nigh  universal.  Far  from 
being  an  original  idea  which  the  Americans  instinctively  adopted,  it  is 
found  in  all  early  societies  whose  economic  conditions  were  similar  to 
those  of  the  American  colonies.  It  was  the  first  crude  attempt  to  attain 
a  semblance  of  equity,  and  it  at  first  responded  roughly  to  the  demands 
of  democratic  justice.  In  a  community  mainly  agricultural,  the  property 
tax  was  not  unsuited  to  the  social  conditions.  But  as  soon  as  commercial 
and  industrial  considerations  came  to  the  foreground  in  national  or 
municipal  life,  the  property  tax  decayed,  became  a  shadow  of  its  former 
self  and,  while  professing  to  be  a  tax  on  all  property,  ultimately  turned 
into  a  tax  on  real  property.  The  disparity  between  facts  and  appearances, 
between  practice  and  theory,  almost  everywhere  became  so  evident  and 
engendered  such  misery,  that  the  property  tax  was  gradually  relegated  to  a 
subordinate  position  in  the  fiscal  system,  and  was  at  last  completely  abol- 
ished. All  attempts  to  stem  the  current  and  to  prolong  the  tax  by  a 
more  stringent  administration  had  no  effect  but  that  of  injurious  reac- 
tion on  the  morale  of  the  community.  America  is  today  the  only  great 
nation  deaf  to  the  warnings  of  history.  But  it  is  fast  nearing  the  stage 
where  it,  too,  will  have  to  submit  to  the  inevitable. 

Failure  in  the  United  States 

The  personal  property  tax  has  had  a  fair  trial  in  nearly  every 
State  in  the  Union,  and  has  everywhere  proved  a  failure.  This 
is  the  practically  unanimous  verdict  of  the  many  able  commis- 
sions that  have  made  a  careful  study  of  the  tax  in  the  various 

1  Report  of  the  Joint  Legislative  Committee  on  Taxation  of  the  State 
of  New  York.  1914.  p.  31-54. 


226  SELECTED  ARTICLES 

states.  To  quote  from  all  of  these  reports,  however  impressive 
the  evidence  would  be,  would  be  merely  cumulative.  We  give 
therefore,  but  brief  extracts  from  five  of  the  most  important, 
which  may  fairly  be  said  to  be  typical  and  representative. 

Report  of  the  Commission  on  Taxation,  Massachusetts, 
1908,  Pages  22-24,  25,  26-28,  33-34 

This  method  of  taxation  is  frequently  described  as  peculiarly 
American  and  democratic,  and  it  is  supposed  to  be  a  method 
which,  if  fully  carried  out,  would  oblige  every  man  to  contribute 
to  the  support  of  public  charges  in  proportion  to  his  ability  to 
pay.  But,  as  a  matter  of  fact,  the  system  is  neither  distinctively 
American  nor  democratic,  and  it  is  admitted  that,  however  ex- 
cellent the  intent  of  the  law,  the  practical  result  has  never  been 
that  all  citizens  do  contribute  in  proportion  to  their  ability  to 
bear  the  charges  of  government. 

The  general  property  tax  was  once  in  nearly  universal  use 
in  Europe,  and  was  brought  to  Massachusetts  by  the  early 
settlers,  who  merely  introduced  here  a  system  with  which  they 
had  been  familiar  in  the  country  from  which  they  came.  In  Eng- 
land, as  in  most  other  countries  of  Europe,  the  principal  form 
fof  direct  taxation  had  long  been  a  general  levy  upon  property. 
In  the  seventeenth  century  this  tax  was  known  as  the  subsidy, 
and  in  practical  operation  produced  the  same  results  as  followed 
its  introduction  in  the  New  World.  Personal  property  always 
managed  to  escape  taxation  in  whole  or  in  part,  so  that  com- 
plaints about  the  inequality  and  injustice  of  the  system  were 
almost  as  common  as  they  are  in  Massachusetts  in  our  own  time. 
In  1592  one  writer  stated  that  not  more  than  five  men  in  Lon- 
don were  assessed  upon  goods  exceeding  £200,  and  in  1601  Sir 
Walter  Raleigh  complained  that  "The  poor  man  pays  as  much 
as  the  rich."  About  the  middle  of  the  seventeenth  century  the 
subsidy  became  so  unsatisfactory  that  it  was  replaced  by  a  new 
tax,  known  as  the  monthly  assessment,  which  was,  however,  but 
the  same  thing  under  another  name.  The  immediate  result  of 
the  change  was  a  somewhat  more  complete  assessment  of  prop- 
erty ;  but  before  long  personalty  began  to  evade  taxation  as  be- 
fore; so  that  in  1692  the  monthly  assessment  was  abolished, 
and  replaced  by  a  new  tax  designed  to  reach  the  true  yearly 
value  of  all  lands,  tenements,  offices  and  personal  estates.  This 


TAXATION  227 

new  tax  was  but  another  property  tax  in  a  somewhat  different 
form,  and  it  soon  fared  as  badly  as  its  predecessors.  During  the 
eighteenth  century  personal  property  disappeared  from  the  as- 
sessment rolls  as  rapidly  as  ever  before,  so  that  by  1798  over 
nine-tenths  of  the  levy  fell  upon  real  estate,  and  less  than  one- 
tenth  upon  offices  and  personal  estate.  By  this  time,  in  fact,  the 
tax  had  generally  come  to  be  known  as  the  "land  tax."  In  some 
towns,  we  are  told,  the  whole  tax  was  assessed  upon  land  and 
houses  and  personal  estates  wholly  escaped. 

In  1798  an  act  was  passed  by  which  the  land  tax  became 
virtually  a  fixed  charge  upon  the  land,  and  since  that  time  no 
further  attempt  has  been  made  in  England  to  levy  a  general 
property  tax.  The  national  revenues  are  now  derived  from  an 
income  tax,  taxes  on  inheritances  and  the  usual  indirect  taxes; 
while  local  revenues  are  drawn  chiefly  from  a  tax  levied  upon 
occupiers  of  land,  houses  and  trade  premises. 

And  in  most  of  the  other  countries  of  Europe  the  result  has 
been  the  same.  .  . 

It  is  equally  erroneous  to  call  the  general  property  tax  a  dem- 
ocratic form  of  taxation.  It  is  not  found  in  such  ultra-demo- 
cratic communities  as  the  Australasian  States;  nor,  with  the  ex- 
ception of  Switzerland,  is  it  found  in  those  countries  of  Europe 
in  which  democratic  ideas  have  taken  deepest  root.  It  was 
brought  to  America  from  England  in  the  seventeenth  century, 
when  democracy  existed  neither  in  the  mother  country  nor  the 
(colonies,  and  has  been  fastened  upon  us  rather  by  historical  ac- 
cident than  because  of  its  inherently  democratic  qualities.  .  . 

The  history  of  the  general  property  tax  in  Massachusetts  is 
not  materially  different  from  its  history  in  other  states.  From 
1651  to  the  present  date  complaints  that  personal  property  evades 
taxation  are  met  at  every  hand.  During  the  last  thirty-five  years 
four  commissions  or  special  committees,  exclusive  of  the  present, 
have  been  appointed  to  study  the  question ;  and  their  reports  dis- 
close the  fact  that  the  taxation  of  intangible  property  is  the 
weakest  point  in  the  entire  system.  There  is  reason  to  believe 
that  the  administration  of  the  law  by  Massachusetts  assessors 
has  been  considerably  better  than  the  administration  of  the  laws 
of  many  other  states.  The  taxation  of  intangible  property  has 
not  been  such  a  complete  farce  with  us  as  it  has  been  elsewhere ; 
yet  we  find  no  one  who  supposes  that  we  are  now  taxing  more 


228  SELECTED   ARTICLES 

than  10  or  20  per  cent  of  the  money,  credits  and  securities  tax- 
able under  our  present  law.  After  careful  study  of  the  subject, 
our  commission  is  forced  to  the  same  conclusion  that  was 
reached  by  the  commission  of  1897,  which  we  reproduce  here: 

It  is  obvious,  however,  that  this  method  of  taxation  encounters,  as 
to  intangible  property,  exceptional  and  indeed  almost  insuperable  dif- 
ficulties. There  are  no  such  external  indications  of  taxable  liability  as 
appear  in  the  case  of  live  stock,  vessels,  stock  in  trade  or  machinery.  Gen- 
eral repute  as  to  the  possession  of  large  means,  or  a  mode  of  life  indi- 
cating an  ample  income,  do  not  necessarily  signify  anything  as  to  tax- 
able securities.  The  investments  of  a  person  of  means  may  be  in  real 
estate  within  or  without  the  State,  or  in  Massachusetts  stocks  or  mort- 
gages, or  in  bonds  of  the  United  States.  An  ample  income,  indicated  by 
general  expenditure,  may  be  derived  either  from  such  sources  already 
taxed  or  not  taxable,  or  from  trade  and  profession,  or  from  taxable  se- 
curities,— these  last  two  being  taxable,  but  taxable  at  very  different  rates. 
The  assessors  hence  must  rely  on  their  knowledge  and  judgment  in  esti- 
mating the  taxable  property  of  this  form.  In  a  great  and  complicated  so- 
ciety, with  a  mass  of  investments  ramifying  in  all  directions  the  assessors 
are  here  confronted  with  a  task  which  the  best  of  them  could  not  execute 
satisfactorily.  Even  the  most  capable,  most  experienced  and  most  con- 
scientious assessors  could  not  have  sufficient  knowledge  and  judgment. 
But  only  average  capacity  can  be  expected;  experience  is  often  lacking; 
and,  even  for  conscientious  assessors,  the  temptations  to  laxity  are  in 
many  cases  irresistible.  Consequently,  the  taxation  of  this  form  of  prop- 
erty is  in  high  degree  uncertain,  irregular  and  unsatisfactory.  It  rests 
mainly  on  guess-work;  it  is  blind,  and  therefore  unequal.  Here  is  its 
greatest  evil,  though  not  its  only  evil.  It  is  haphazard  in  its  practical 
working,  and  hence  demoralizing  alike  to  taxpayers  and  to  tax  officials. 

Report  of  Maryland  Commission,  1888,  Pages  101,  103,  151 

The  truth  is,  the  existing  system  is  so  radically  bad,  that 
the  more  you  improve  it  the  worse  it  becomes.  This  lies  in  the 
nature  of  things  and  nothing  any  Legislature  can  do  can  alter 
this  condition  of  things.  Experience  and  reason  alike  teach  this, 
and  in  my  opinion  place  it  beyond  controversy  for  all  those  who 
have  eyes  to  see  what  is  passing  about  them  every  day  of  their 
lives. 

The  reason  why  our  present  system  of  taxation  does  not 
operate  satisfactorily  can  be  stated  in  a  word;  although  it  is  on 
the  face  of  it  fair  and  simple,  it  is  found  in  practice  to  be  an 
impracticable  theory,  for  a  large  portion  of  property  escapes  tax- 
ation, and  that  the  property  of  those  best  able  to  bear  the  burdens 
of  government,  namely,  the  wealthy  residents  of  cities.  On  the 
one  hand,  it  is  impossible  to  find  this  property,  and  to  force  men 
to  make  returns  under  oath,  results  invariably  in  perjury  and 
demoralization,  without  discovery  of  property;  on  the  other 
hand,  federal  laws  over  which  our  States  and  municipalities 
have  no  control,  enable  many  to  escape  taxation  by  investments, 
often  temporary,  in  federal  bonds,  exempt  from  taxation. 


TAXATION  229 

Personal  property  is  sometimes  discovered  in  its  entirety, 
but  it  is  then  nearly  always  the  property  of  the  comparatively 
helpless,  namely,  widows  and  orphans,  whose  possessions  are  a 
matter  of  public  record.  Less  often  a  burden  is  imposed  upon 
the  conscientious.  Thus,  I  happen  to  know  of  one  wealthy 
town  of  a  few  thousand  inhabitants,  where  three  men  of  con- 
scientious convictions  with  regard  to  a  man's  duty  to  the  com- 
monwealth, pay  taxes  on  their  personalty,  although  they  have 
as  good  an  opportunity  to  escape  as  others.  This  state  of 
things  naturally  produces  dissatisfaction  on  the  part  of  farmers 
and  other  hard  working  people,  who  feel  that  personalty  ought 
to  bear  a  share  of  the  burden  of  taxation.  On  this  account 
they  suggest  various  things,  like  taxation  of  mortgages,  and  a 
more  vigorous  search  for  hidden  property.  Their  aim,  as  I 
have  said,  is  commendable,  but  to  attempt  to  reach  the  desired 
goal  by  direct  means,  under  existing  laws,  or  any  laws  which 
do  not  imply  a  change  of  the  system  of  taxation,  is  as  Utopian 
as  the  dream  of  the  most  radical  socialist.  If  we  desire  to 
accomplish  a  purpose  we  must  use  means  adequate  to  the  end 
in  view.  .  . 

Another  aspect  of  this  case  is  presented  by  the  facts  of  com- 
petition in  business.  Those  who  escape  the  payment  of  a  fair 
share  of  business  taxes  have  an  advantage  in  business  which  en- 
ables them  to  undersell  their  competitors,  and  when  a  business 
man  sees  ruin  staring  him  in  the  face  because  his  dishonest 
neighbor  makes  false  returns  and  pays  taxes  on  only  a  frac- 
tional part  of  his  property,  the  temptation  to  do  likewise  is 
almost  irresistible,  except  for  moral  heroes,  and  moral  heroism 
cannot  be  made  the  basis  of  governmental  action. 

Report  of  Kentucky  Special  Commission,  1912,  Pages  83-4 

In  1904  the  total  roll  was  $630,795,464,  and  monies,  credits 
and  securities  were  assessed  at  $68,829,446,  or  10.9  per  cent. 

In  1911  the  total  roll  was  $846,450,020,  and  monies,  credits 
and  securities  were  assessed  at  $83,468,030,  or  9.8  per  cent. 

In  1906  the  ratio  was  10.8  per  cent. 

In  1907  the  ratio  was  11.5  per  cent. 

In  1908  the  ratio  was  10.1  per  cent. 

In   1910  the  ratio  was  9.5  per  cent. 

As  we  said  in  our  preliminary  report :  The  state  of  Ken- 
tucky received  more  revenue  for  the  year  1912  from  its  dogs 
than  it  did  from  all  the  bonds,  monies  and  stocks  in  the  state. 


230  SELECTED   ARTICLES 

When  finally  we  note  that  money,  credits  and  securities 
taxed  in  1910,  the  year  of  the  census,  were  $79,000,000  or  only 
$34  per  capita,  the  necessity  for  further  research  seems  to 
disappear. 

Nobody  can  seriously  maintain  that  all  monies,  credits  and 
securities  are  taxed  or  any  substantial  part. 

In  the  opinion  of  the  Commission,  the  present  methods  of 
taxing  money  and  credits  are  ineffective  in  producing  revenue 
and  highly  unjust  in  their  operation  on  individual  taxpayers. 
They  constitute  one  of  the  gravest  problems  connected  with  our 
system  of  taxation,  and  until  they  are  changed  our  tax  laws  will 
remain  vitally  and  fundamentally  defective. 

Report  of  Virginia  Tax  Commission,  1911,  Pages  69-70 

To  summarize,  it  has  appeared  that  inequalities  and  under- 
valuations of  every  sort  appear  in  our  taxation  of  personal 
property.  How  extensive  these  are  can  only  be  surmised ;  how 
iniquitous  they  are  can  merely  be  imagined.  Viewing  the  situ- 
ation as  a  whole,  the  writer  believes  that  it  would  be  better  to 
remove  the  tax  on  personal  property  altogether  and  seek  other 
sources  of  revenue,  than  to  perpetuate  the  frauds,  inequalities 
and  under-valuations  which  now  encumber  the  administration  of 
our  tax  laws. 

A  law  which  permits  these  things  is  unquestionably  a  failure, 
and  it  behooves  those  interested  in  the  problem  to  ascertain  why 
and  wherein  the  law  has  broken  down.  Examination  has  shown 
that  the  failure  of  the  property  tax  in  Virginia  may  be  traced 
to  four  things.  These  are,  first,  the  attempted  enforcement  of  a 
law  under  industrial  conditions  which  render  it  inoperative  of 
necessity  and  invalidate  the  theory  upon  which  it  is  based; 
second,  the  failure  of  many  commissioners  of  the  revenue  to  en- 
force the  existing  laws;  third,  certain  defects  in  the  law  which 
make  deceit  and  injustice  easy;  fourth,  the  growth  of  a  feeling 
among  our  people  that  there  is  nothing  dishonorable  or  dis- 
creditable in  "dodging  taxes." 

Report  of  National  Tax  Association,  Vol.  IV,  Pages  309-10 

To  sum  up,  your  committee  finds: 

That  the  general  property  tax  system  has  broken  down; 
That  it  has  not  been  more  successful  under  strict  administra- 
tion than  where  the  administration  is  lax; 


TAXATION  231 

That  in  the  states  where  its  administration  has  been  the  most 
stringent,  the  tendency  of  public  opinion  and  legislation  is  not 
toward  still  more  stringent  administration,  but  toward  a  mod- 
ification of  the  system; 

That  the  same  tendency  is  evident  in  the  states  where  the 
administration  has  been  more  lax; 

That  the  states  which  have  modified  or  abandoned  the  gen- 
eral property  tax  show  no  intention  of  returning  to  it ; 

That  in  the  states  where  the  general  property  tax  is  required 
by  constitutional  provisions,  there  is  a  growing  demand  for  the 
repeal  of  such  provisions. 

We  conclude,  therefore,  that  the  failure  of  the  general  prop- 
erty tax  is  due  to  the  inherent  defects  of  the  theory; 

That  even  measurably  fair  and  effective  administration  is 
unattainable ;  and  that  all  attempts  to  strengthen  such  adminis- 
tration serve  simply  to  accentuate  and  to  prolong  the  inequalities 
and  unjust  operation  of  the  system. 

Summary  of  Reports  of  New  York  Commissions 

The  New  York  authorities  are  all  to  the  same  effect. 

A  more  unequal,  unjust,  and  partial  system  for  taxation 
could  not  well  be  devised.  (First  Annual  Report  of  the  State 
Assessors,  1860,  p.  12.) 

The  defects  of  our  system  are  too  glaring  and  operate  too 
oppressively  to  be  longer  tolerated.  (Comptroller's  Report, 
1859.) 

The  burdens  are  so  heavy  and  inequalities  so  gross  as  almost 
to  paralyze  and  dishearten  the  people.  (Assessor's  Report,  1873, 

P.  3-) 

The  absolute  inefficiency  of  the  old  rickety  statutes  passed  in 
a  bygone  generation  is  patent  to  all.  (Assessor's  Report,  1877, 

P.  5-) 

The  hope  of  obtaining  satisfactory  results  from  the  present 
broken,  shattered,  leaky  laws,  is  vain.  (Report  Association  of 
Taxes  and  Assessments,  1876,  p.  52.) 

The  system  is  a  farce,  sham,  humbug.  (Assessor's  Report 
1879,  P.  23.) 

The  present  result  is  a  travesty  upon  our  taxing  system,  which 
aims  to  be  equal  and  just.  (Comptroller's  Report,  1889,  p.  34.) 

The  general  property  tax  is  a  reproach  to  the  state,  an  out- 
rage upon  the  people,  a  disgrace  to  the  civilization  of  the  nine- 
teenth century,  and  worthy  only  of  an  age  of  mental  and  moral 


232  SELECTED   ARTICLES 

darkness  and  degradation  when  the  only  equal  rights  were  those 
of  the  equal  robber.  (Comptroller's  Report,  1889,  p.  34.)  The 
above  quotations  from  the  New  York  reports  are  taken  from 
Seligman's  Essays  in  Taxation. 

Report  of  1872 

The  report  of  the  Commission  of  1872,  of  which  Mr.  David  A. 
Wells  was  chairman,  was  one  of  the  ablest  tax  reports  ever  writ- 
ten. We,  therefore,  quote  from  it  at  some  length: 

In  the  case  of  New  York,  no  one,  either  officials  or  citizens,  is  satisfied 
with  the  existing  system  or  its  administration;  and  so  apparent,  more- 
over, are  its  defects,  that  the  necessity  of  reform  is  almost  universally 
acknowledged.  But  the  Commissioners  who  have  made  the  system  a 
matter  of  special  study  and  inquiry,  go  further,  and  unqualifiedly  assert 
that,  as  it  exists  today  it  is  more  imperfect  in  theory  and  defective  in 
administration  than  almost  any  system  that  has  ever  existed,  and  that  its 
longer  recognition  and  continuance  is  alike  prejudicial  to  the  material  in- 
terest of  the  state  and  the  morality  of  its  people. 

Real  property  being  visible  and  tangible,  presents  no  inherent  difficulty 
in  the  way  of  assessment,  and  the  system  might  be  reasonably  supposed  to 
work  with  some  degree  of  uniformity  and  equality,  yet  they  found  it 
impossible  to  find  any  two  contiguous  towns,  cities  or  counties  in  which 
the  valuation  of  real  estate  approximates  in  any  degree  to  uniformity. 

It  is  evident  that  the  law  in  this  respect  has  become  a  dead  letter 
and  wholly  inoperative.  The  attempts  to  tax  personal  property  under  the 
same  system  are  infinitely  more  farcical  and  disgraceful. 

The  reasons  for  the  failure  arc  as  follows :  " 

In  the  first  place,  a  large  part  of  personal  property  "is  incorporeal 
and  invisible,  easy  of  transfer  and  concealment,  not  admitting  of  valuation 
by  comparison  with  any  common  standard,  and  the  situs  or  locality  of 
which  for  purposes  of  assessment  and  taxation,  involves  some  of  the  oldest, 
most  controverted  and  yet  unsettled  questions  of  law.  .  .  It  is  obvious, 
therefore,  that  the  law  contemplates  the  doing  of  an  act  ...  which 
cannot  be  done  without  the  fullest  cooperation  through  communication 
of  information  of  the  taxpayer  himself;  and  yet  for  the  imparting  of 
which  the  two  most  powerful  influences  that  can  control  human  action, 
viz.,  love  of  gain  and  the  desire  to  avoid  publicity  in  respect  to  one's 
private  affairs,  cooperate  to  oppose." 

Report  of  1893 

The  taxation  of  personal  property  is  "unsatisfactory  and  un- 
just, and  if  no  better  plan  of  administration  be  devised  and 
carried  into  effect  than  that  now  in  existence,  it  is  idle  and 
worse  than  useless  to  attempt  the  taxation  of  personalty,  how- 
ever objectionable  the  alternative."  (Report  of  Counsel  to 
Revise  the  Tax  Laws  of  the  state  of  New  York,  1893.) 

Report  of  /poo 

The  Joint  Committee  on  Taxation  for  the  year  1900  likewise 
found  that  the  personal  property  tax  was  a  failure,  and  did  not 
believe  any  reform  would  remedy  the  situation  unless  the  listing 


TAXATION  233 

system  were  adopted.  This,  however,  the  committee  was  un- 
willing to  recommend.  It  found  that  while  the  first  returns  were 
apparently  good  under  the  listing  system,  it  eventually  drove 
capital  out  of  the  state. 

Report  of  1907 

The  principal  difficulty  connected  with  our  system  of  local 
revenue  is  the  taxation  of  personal  property.  .  .  It  is  a 
universally  accepted  maxim  that  direct  taxation  of  the  citizen 
should  be  as  nearly  as  possible  in  proportion  to  his  ability  to  pay. 
The  actual  situation  in  New  York  involves  in  practice  the  very 
inverse  of  this  principle. 

As  a  result  of  its  study  the  committee  concluded: 

1.  That  there  has  been  gradual  and  steady  increase  in  the 
value  of  real  and  personal  property; 

2.  That  personal  property  escapes  paying  its  share  of  the 
burden ; 

3.  That  the  greater  the  amount  of  personal  property  placed 
on  the  rolls,  the  larger  the  cancellations  or  reductions; 

4.  That  the  burden  falls  heaviest  on  the  residents  of  our 
state  and  the  smaller  taxpayer : 

5.  That  the  non-residents  have  almost  ceased  to  pay  taxes; 

6.  That  the  collection  of  the  personal  property  tax  has  be- 
come more  and  more  difficult. 

Causes  of  the  Failure  of  the  Personal  Property  Tax 

Briefly  stated,  the  objections  to  the  personal  property  tax  and 
the  reasons  for  its  failure  arc  as  follows : 

i.     Inequality  of  assessments. 

a.  As  between  towns.  It  is  notorious,  and  the  facts  to  be 
submitted  later  will  show  beyond  question,  that  in  some  towns 
personal  property  is  assessed  at  something  like  true  values, 
whereas  in  others  no  attempt  whatsoever  is  made  to  reach  the 
personal  property  of  either  corporations  or  individuals,  or  if  it 
is  reached,  it  is  assessed  at  a  value  insignificant  as  compared 
with  true  value.  This  has  a  tendency  to  produce  throughout  the 
state  "isles  of  safety"  or  residential  districts  desirable  from  a 
tax  standpoint  for  both  individuals  and  corporations  who,  by 
establishing  a  nominal  residence,  and  by  the  payment  of  a  small 
or  nominal  tax,  in  one  town,  are  enabled  to  escape  their  propor- 
tion of  the  taxes  in  the  town  in  which  they  actually  reside. 
Thus,  the  one  town  is  enabled  to  increase  its  tax  base  and  lower 


234  SELECTED   ARTICLES 

its  rate,  while  the  other  is  deprived  of  large  amounts  of  taxable 
property  and  is  obliged  to  tax  that  which  remains  within  its 
jurisdiction  at  a  higher  rate. 

b.  As  between  citizens  of  the  same  town.  The  system  is 
practically  one  of  self-assessment,  under  which  the  dishonest 
man  who  is  willing  to  swear  off  his  taxes,  does  so  at  the  ex- 
pense of  the  honest  man  whose  conscience  does  not  permit  him 
to  do  so. 

2.  The  personal  property  tax  at  a  general  property  rate,  let 
us  say  2  per  cent,  is  confiscatory  and  an  actual  incentive  to  dis- 
honesty.    Two  per  cent  is  the  equivalent  of  50  per  cent  of  the 
income  of  a  4  per  cent  bond,  and  no  country  in  the  world  in 
normal  times  has  or  can  successfully  impose  a  50  per  cent  in- 
come tax.    The  taxpayer  will  not  submit  to  it,  particularly  when 
he  knows  that  thousands  of  fellow  citizens,  in  many  cases  with 
incomes  much  larger  than  his  own,  are  actually  evading  its  pay- 
ment. 

3.  The  theory  underlying  the  general  property  tax  is  that 
both  real  and  personal  property  should  be  taxed  at  the  same  rate 
and  on   the  same  basis.     Without  at  this  time  discussing  the 
soundness  of  this  particular  theory,  as  a  matter  of  practice,  real 
estate  bears  practically  the  entire  burden,  while  personal  prop- 
erty, though  theoretically  liable,  fails  to  contribute  its  share  to 
the  support  of  government. 

4.  The  deduction  of  debts  invites  fraud  and  evasion,  yet  not 
to  allow  deduction  of  debts  is  in  some  cases  double  taxation. 
As  has  been  said,  "Individuals  should  be  taxed  on  what  they 
own,  not  on  what  they  owe."    This,  of  course,  is  not  true  in  the 
case  of  many  corporations  that  obtain  most  of  their  working 
capital  by  issuing  bonds. 

5.  The  personal  property  tax  is  unequal  as  between  different 
grades  of  property.     It  falls  with  equal  weight  upon  unproduc- 
tive property,  on  property  yielding  comparatively  small  income, 
and  on  property  bringing  in  a  very  large  return. 

6.  Under  modern  conditions,  property  no  longer  represents 
the  true  test  of  ability  to  pay.     In  a  simple  agricultural  com- 
munity,  where   personalty  is   for  the   most   part   tangible   and 
visible,  property  furnishes  a  fairly  equal  measure  of   a  man's 
ability  to  contribute  to  the  support  of  government;  but  under 
modern   business   development   this   is   by  no   means   the   case. 
Take  the  case  of  the  merchant  with  a  large  turnover  and  a  com- 


TAXATION  235 

paratively  low  profit.  His  ability  to  pay  taxes  is  by  no  means 
the  equal  of  that  of  the  merchant  with  a  small  stock  of  goods, 
a  rapid  turnover  and  large  profits;  yet  under  the  personal  prop- 
erty tax  the  former  rather  than  the  latter  will  pay  the  larger  tax. 
Take  the  case  of  the  manufacturer.  The  one  may  own  a  very 
large  plant  with  complicated,  expensive  machinery,  and  the 
necessities  of  his  business  may  require  him  to  carry  a  large  in- 
ventory. He  may  earn  but  a  small  return  on  his  investment. 
Another  manufacturer  in  another  line  may  have  a  smaller  plant, 
much  less  valuable  machinery,  a  comparatively  light  inventory, 
and  yet  because  of  the  nature  of  his  business  may  have  a 
greater  income.  Here  again  the  ability  of  the  latter  to  contribute 
is  greater  than  that  of  the  former,  yet  the  former  under  the  per- 
sonal property  tax  pays  the  heavier  share.  As  between  individ- 
uals, the  lawyer  earning  $50,000  a  year  pays  nothing  on  the  tax- 
able ability  represented  by  these  large  earnings,  while  the  widow 
or  the  retired  business  man  or  wage-earner  with  $500  a  year  de- 
rived from  accumulated  savings  of  $10,000  is  compelled  to  turn 
over  $200  of  it  to  the  tax  gatherer.  The  investor  who  makes  an 
unwise  investment  from  which  he  gets  little  or  no  return  pays 
as  much  as  the  fortunate  individual  enjoying  fat  dividends;  the 
man  with  a  large  unearned  income  and  extravagant  habits  gets 
off  scotfree,  while  the  thrifty  one  who  in  spite  of  a  lower  earn- 
ing capacity  and  less  ability  to  pay  taxes  manages  to  lay  some- 
thing aside  is  taxed  on  the  evidences  of  his  thrift. 

7.  Personal  property  under  modern  conditions  consists  for 
the  most  part  of  securities,  credits  and  other  intangibles,  easy 
of  concealment  and  which  cannot  be  discovered  without  the  co- 
operation of  the  taxpayer  himself — a  cooperation  which  the  tax- 
payer declines  to  furnish,  and  which  experience  has  demon- 
strated cannot  be  compelled.  Moreover,  the  large  accumulations 
of  wealth  in  form  of  intangibles  are  usually  concentrated  in  the 
great  cities  under  conditions  which  make  it  well-nigh  impossible 
for  the  assessors  to  locate  the  owners — a  complete  change  from 
the  conditions  under  which  the  personal  property  tax  was 
adopted,  when  life  was  simple,  wealth  fairly  equally  distributed, 
when  people  lived  in  villages  or  small  towns,  and  when  each  man 
knew  not  only  what  his  neighbor  owned,  but  what  property  of 
his  was  assessed.  Even  in  so  far  as  tangible  personalty  is  con- 
cerned, consider  the  difficulty  which  confronts  the  average  as- 
sessor who  may  be  required  to  assess  accurately  anything  from 


236  SELECTED   ARTICLES 

a  Rembrandt  picture  to  a  large  modern  industrial  plant.  The 
fact  is  that,  at  the  wages  paid — which  in  many  instances  do  not 
exceed  $3  a  day — it  is  impossible  to  obtain  any  man  with  a  suffi- 
cient accumulation  of  knowledge  to  enable  him  to  deal  success- 
fully with  a  field  so  wide  as  to  include  within  its  range  practically 
every  form  of  property  found  in  a  complicated  society. 

8.  The  great  number  of  exempt  securities  makes  it  possible 
for  the  wise  investor  lawfully  to  escape  personal  property  taxa- 
tion, leaving  the  tax  to  fall  on  those  not  sufficiently  fortunately 
situated  to  obtain  wise  legal  advice  and  on  those  ignorant  of  the 
law. 

Injustice  of  the  Personal  Property  Tax 

All  semblance  of  justice  and  equity  has  long  since  left  the 
personal  property  tax,  which  has  been  suffered  to  remain  on  our 
statute  books  because  of  the  widespread  apathy  and  ignorance 
of  the  public  in  regard  to  taxation,  and  because  of  the  fact  that 
it  has  not,  generally  speaking,  been  enforced. 

1.  As  between  tangible  and  intangible  personalty.     Tangible 
property  can  be  seen ;  intangible  property  cannot  be  seen.     Tax 
assessors  find  it  comparatively  easy,  therefore,  to  discover  tang- 
ible property,  while  they  have  the  greatest  difficulty  in  locating 
intangible  property.   Everywhere  the  result  is  the  same — not  only 
is   a  much   larger  proportion   of   tangible   property   reached   for 
the  purposes  of  taxation,  but  that  proportion  reached  bears  a 
much   higher    rate    of    taxation    as    a    result    of    the    escape    of 
intangibles. 

The  inequity  is  further  accentuated  by  the  fact  that  those 
most  able  to  pay  have  their  wealth  largely  invested  in  intangibles 
and  that  those  least  able  to  pay  have  their  wealth  largely  invested 
in  tangibles.  The  magnitude  of  this  injustice  will  appear  as  we 
examine  the  effect  of  this  tax  upon  the  rich  as  compared  to  the 
poor,  upon  the  widows  and  orphans,  upon  the  farmers  as  com- 
pared with  owners  of  other  forms  of  wealth  and  upon  the  strug- 
gling business  as  compared  to  the  well-established  business.  In 
every  case  the  inequity  increases  with  the  inability  of  the  par- 
ticular classes  to  bear  taxes. 

2.  As  between  the  poor  and  the  wealthy.     Not  only  do  the 
poor  and  those  in  only  moderate  circumstances  have  their  wealth 
invested  in  easily  seen  and  easily  taxed  tangibles,  but  the  kind 
of  tangible  personalty  in  which  the  poor  man  invests  his  money, 


TAXATION  237 

whether  it  be  in  his  household  effects  or  in  his  small  business, 
is  of  such  nature  that  the  ordinary  tax  assessor  is  familiar  with 
it  and  can  therefore  assess  at  well-nigh  its  true  value.  This  is 
true  as  well  of  the  tangible  personalty  that  makes  up  the  small 
business  concern  as  of  the  tangible  personalty  included  in  the 
household  goods  and  other  personal  effects.  In  the  case  of  the 
wealthy  man,  however,  the  case  is  a  very  different  one.  Not 
only  is  a  large  part  of  his  wealth  ordinarily  invested  in  intang- 
ibles, but  much  of  his  tangible  personalty,  whether  that  of  his 
personal  effects  or  that  of  his  business,  is  of  a  kind  that  the 
.ordinary  assessor  (in  his  daily  life)  is  unfamiliar  with,  and  it  is 
also  of  a  kind  that  is  difficult  of  valuation.  This  is  true  not  only 
of  the  wealthy  individual  but  of  the  wealthy  corporation  as  well. 
In  regard  to  the  former,  the  valuation  of  such  property  as 
jewelry,  works  of  art,  books,  etc.,  require  a  knowledge  and  skill 
not  possessed  by  the  average  assessor.  In  regard  to  the  rich 
corporations,  such  as  mercantile  corporations,  carrying  large 
stocks  of  fine  fabrics,  jewelry,  etc.,  and  those  manufacturing 
corporations  having  machinery  of  great  value  as  well  as  large 
stocks  of  products  in  the  process  of  manufacture,  the  experience 
of  forty-eight  states  of  the  Union  discloses  with  unmistakable 
clearness  that  the  average  assessor  does  not  and  cannot  assess 
these  subjects  with  any  degree  of  fairness. 

When  we  come  to  investment  in  securities,  a  large  investor 
usually  has  the  knowledge,  or  can  obtain  such  advice,  as  will 
enable  him  to  invest  in  tax-exempt  securities,  while  the  small 
investors,  particularly  women,  are  apt,  through  ignorance,  to 
invest  in  taxable  bonds. 

3.  Concerning  widows  and  orphans  and  trust  estates.  If 
there  is  one  group  of  property  which  should  escape  with  reason- 
able taxation,  it  would  seem  to  be  that  property  the  income  from 
which  is  set  aside  for  the  support  and  education  of  those  who 
have  been  deprived  through  death  of  the  head  of  the  family, 
viz.,  the  widows  and  the  orphans.  When  the  chief  bread-winner 
dies,  a  record  of  his  property  must  be  filed  in  the  probate  court, 
where  it  is  easily  accessible  to  the  tax  assessors.  Here  it  is 
caught  and  taxed,  while  similar  property  held  by  others  is  un- 
taxed.  Were  it  taxed  at  only  a  fair  rate,  it  would  still  be  ques- 
tionable whether  this  property  ought  not  to  be  partially  exempt. 
However,  it  is  not  taxed  at  a  fair  rate,  but  at  a  rate  which  makes 
the  personal  property  tax  in  this  case  one  of  the  most  barbarous 


238  SELECTED   ARTICLES 

to  be  found  in  any  country.  Cases  are  frequent  where  as  high 
as  25  to  50  per  cent  of  the  total  income  set  aside  for  the  support 
of  widows  and  orphans  is  taken  by  this  tax.  How  serious  the 
situation  is  was  well  exemplified  by  investigation  made  by  one 
of  the  witnesses  who  appeared  before  the  Committee.  He  stated 
that  he  found  that  in  one  county  (not  in  the  state  of  New 
York)  the  roll  showed  that  about  20  to  25  per  cent  of  the  per- 
sonal property  taxes  were  paid  by  women.  It  will,  of  course,  be 
readily  agreed  that  women  do  not  own  anything  like  25  per  cent 
of  personal  property  in  any  state.  Another  witness  told  us  of  a 
woman  whose  husband  had  died  leaving  an  estate  all  invested  in 
4  per  cent  bonds.  The  woman  was  assessed  by  New  York  City's 
Tax  Department  for  the  full  value  of  the  bonds.  There  was  no 
possibility  of  getting  the  tax  reduced.  Counsel  advised  her  to 
change  her  investments,  but  she  refused  to  do  that  because  her 
husband  had  made  them,  so  she  was  obliged  to  leave  the  city 
and  change  her  residence. 

A  simple  example  will  illustrate  how  this  tax  works.  Assume 
that  a  prudent  head  of  a  family  had  been  able  to  save  $15,000 
which  had  been  invested  in  municipal  bonds  yielding  4  per 
cent.  The  annual  income  to  the  widow  would  be  $600.  At  a  tax 
rate  of  2  per  cent  on  the  value  of  this  personal  property,  the 
widow  would  be  compelled  to  surrender  $300  to  the  tax  authori- 
ties or  one-half  of  her  total  income.  In  some  localities  tax  rates 
have  risen  as  high  as  3  or  4  per  cent  and  cases  are  not  unknown 
where,  had  the  tax  law  been  enforced,  the  widow  would  have 
been  deprived  of  her  entire  income.  Indeed,  cases  are  known 
where  the  tax  has  not  only  absorbed  all  of  the  income,  but  has 
compelled  the  owner  to  pay  an  additional  amount.  In  the  1915 
New  York  Tax  Conference,  Mr.  Lawson  Purdy  cited  such  a 
case.  Before  the  December,  1915,  hearings  of  the  Joint  Legis- 
lative Committee  on  Taxation,  Professor  Charles  J.  Bullock  of 
Harvard  University  testified  that  cases  of  such  gross  injustice 
amounting  to  the  taking  of  from  one-third  to  one-half  of  the  in- 
come of  widows  and  orphans  were  not  infrequent  where  the 
general  property  rate  was  applied  to  personalty.  Upon  this 
point,  the  Report  of  the  Massachusetts  Tax  Commission  for  1908 
speaks  as  follows: 

The  situation  is  made  worse  by  the  fact  that  the  local  tax  rates 
throughout  the  country  are  so  high  that  they  take  from  the  holder  of 
good  securities  an  excessive  proportion  of  his  income.  According  to  the 
United  States  census,  the  average  rate  levied  upon  property  assessed  for 


TAXATION  239 

local  taxation  in  the  United  States  in  1902  was  about  2  per  cent  of  the 
capital  value  thereof,  or  as  tax  rates  are  usually  reckoned  in  Massachusetts, 
$20  on  each  $1,000  of  the  assessed  valuation.  In  many  places  real  estate 
was  so  far  undervalued  that  a  tax  of  2  per  cent  upon  the  assessed  value 
may  not  have  amounted  to  more  than  i  per  cent  or  even  1/2  of  i  per  cent 
of  the  true  value  of  the  property.  But  personal  property,  if  returned 
for  taxation,  must  be  valued  usually  at  its  true  cash  value;  and  it  is 
clear  that  a  tax  rate  of  2  per  cent  may  take  from  the  holder  one-third 
or  one-half  of  his  income.  Under  such  circumstances  few  persons  can 
or  will  make  returns  of  their  personal  estates;  and  the  usual  result  is 
that  this  property  is  taxed  by  the  method  of  arbitrary  estimate,  or  "doom- 
age." When  returns  are  made  they  come  usually  from  trustees  and  exec- 
utors of  small  estates,  who  cannot  easily  evade  the  law,  and  have  less 
inducement  to  do  so.  Thus  it  comes  about  that  the  tax  on  personal  prop- 
erty bears  with  exceptional  severity  upon  widows  and  orphans,  the  most 
helpless  class  in  the  community,  and  is  most  easily  evaded  by  the  rich 
and  powerful,  who  can  best  afford  to  pay  it.  Instances  have  come  to 
the  attention  of  members  of  the  present  Commission  in  which  widows  are 
paying  upon  small  estates  taxes  that  take  as  much  as  40  or  50  per  cent 
of  the  income;  whereas  in  the  same  communities  men  whose  taxable  prop- 
erty would  probably  amount  to  millions  are  paying  a  few  hundred  dol- 
lars of  personal  taxes  upon  merely  nominal  assessments.  These  condi- 
tions are  not  peculiar  to  Massachusetts — they  have  been  repeatedly  dis- 
closed by  the  reports  of  tax  commissions  in  other  states;  and  among 
students  of  American  taxation  it  has  become  a  mere  truism  that  our 
present  taxes  upon  personal  property  actually  fall  upon  the  taxpayers  in 
inverse  proportion  to  their  ability  to  pay. 

4.  As  between  farms  and  other  forms  of  wealth.  That 
the  farmers  bear  a  disproportionate  share  of  taxation  is  gen- 
erally known  and  accepted  by  most  of  the  informed  throughout 
the  United  States.  It  is  not  generally  known  by  the  farmers  or 
the  public  at  large,  however,  to  what  an  extreme  degree  this 
disproportion  is  carried.  It  is,  of  course,  well  known  that  most 
of  a  farmer's  personalty  is  in  a  tangible  form,  and  that  it 
cannot  be  hidden  from  the  tax  assessor.  Wherever  the  law  is 
enforced  the  farmers'  machinery  and  implements,  his  stock  and 
other  tangibles  not  only  pay  a  much  higher  rate  than  their  share, 
but  a  rate  out  of  all  proportion  to  the  earning  power  of  such 
property.  This  disproportionate  rate  is,  of  course,  largely  made 
up  of  that  part  of  the  tax  burden  that  is  evaded  by  other  forms 
of  wealth.  The  full  significance  of  this  inequity  cannot  be 
grasped  without  comparing  the  rates  upon  agricultural  property 
and  income  with  that  of  the  other  principal  industries  of  the 
state. 

A  study  of  California  in  this  regard  is  of  much  value  to  New 
York.  A  few  years  ago  a  very  careful  investigation  was  made 
of  the  relative  tax  burdens  borne  by  the  various  classes  of 
wealth  in  California,  and  the  results  of  this  investigation  were 
set  forth  in  the  1906  California  Tax  report.  Most  of  the 
statistics  given  immediately  below  are  either  copied  from  that 


240  SELECTED   ARTICLES 

report  or  represent  computations  based  upon  the  data  there  set 
forth.  The  following  table  taken  from  page  68  of  this  report 
is  a  comparative  statement  of  manufacturing  industries  and 
agriculture  in  respect  to  the  capital  investment,  percentage  of 
total  capital  value  invested  in  realty  and  personalty,  and  per- 
centage of  each  taxed: 

COMPARISON   OF  TAXES  ON  MANUFACTURING  AND  FARMS  IN  CALIFORNIA 


1 

Capital  total                             ! 

Percei 
Aggregates 
Manufactures    Agriculture 
£205,395,025      $796,527,955 
34,735,4i6       630,444,960 
22,562,385          77,468,000 
62,440,759         21,311,670 
85,656,465          67,303,325 
63,500,000       474,731,497 
1,049,932            9,030,000 
302,874,761        131,690,606 
52,172,862         91,419,866 

itage  of  total  capital 
Manufac-    Agricul- 
tures              ture 

100.0                100.0 

16.9              79.0 
n.o                9.7 
30.4                2.7 
41.7                8.5 
31.0              65.0 
.51              1.14 
147.0              16.5 
25-4              "-5 
.346            6.86 
2.01              0.88 

Land     . 

Buildings 

Machinery,  resp.  implements 
Other    assets 

Taxes 

Taxes  of  net  product   . 

This  table  discloses  some  very  interesting  facts;  and  these 
facts  are  of  considerable  interest  to  New  York,  because  they 
illustrate  a  condition  in  California  very  similar  to  the  one  now 
prevailing  in  New  York  State.  At  least  this  is  true  in  so  far  as 
they  illustrate  the  inequity  existing  between  farm  property  and 
that  of  other  forms  of  wealth.  It  should  be  remembered,  how- 
ever, that  the  actual  inequity  as  between  these  two  forms  of 
wealth  is  probably  greater  in  New  York  than  in  California. 

The  above  table  shows  that  while  agriculture  pays  6.86  per 
cent  of  its  gross  product  in  taxes,  manufactures  pay  only  .34 
per  cent  or  Yz  of  i  per  cent.  In  other  words,  measured  in  terms 
of  gross  product,  the  tax  burden  upon  agriculture  was  about 
twenty  times  as  heavy  as  that  upon  manufactures.  In  terms 
of  net  product,  the  disproportion,  though  not  so  extreme,  is 
still  very  large.  The  table  shows  that  while  manufactures  pay 
2.01  per  cent  of  net  products  in  taxes,  agriculture  pays  9.88  per 
cent  in  taxes.  In  other  words,  the  tax  burden  measured  in  terms 
of  net  product  is  nearly  five  times  upon  agriculture  what  it  is 
upon  manufacture.  It  should  be  noted  here  that  this  statement 
is  based  upon  the  assumption  that  manufactures  pay  approx- 
imately 2  per  cent  of  net  income  in  California.  This  rate  is 
probably  higher  than  that  borne  by  manufactures  in  New  York 
State.  Statistics  such  as  those  gathered  by  the  Federal  Census 
indicate  that  the  proportion  borne  by  manufactures  in  New 


TAXATION  241 

York  is  less.  These  facts  are  brought  out  in  more  detail  in 
part  VIII  of  this  report  which  deals  with  the  taxation  of 
manufacturing  corporations. 

The  following  table  summarizes  the  tax  burdens  borne  by 
California  farms: 

Per  cent  of  taxes  to  true  value   1.14 

Per  cent  of  taxes  to  gross  returns    6.86 

Per  cent  of  taxes  to  net  returns,    including    farmer's    own    compensa- 
tion and  certain  expenses   9.88 

The  following  tabulation  compares  the  percentage  of  tax 
paid  by  farms  and  manufactures: 

Ratio  of  farm 

taxes  to  manufac- 

Farms    Manufactures       turing  taxes 

Percentage  paid  on  capital  value 1.14%        1/2  of  i%  3  to  i 

Percentage  paid  on  gross  income 7.00%        1/3  of  i%  20  to  i 

Percentage  paid  on  net   income 10.00%  2%  5  to  i 

In  regard  to  the  comparative  burdens  borne  by  various  kinds 
of  wealth  in  New  York  State,  no  study  similar  to  that  of  Cali- 
fornia has  been  made  with  the  same  degree  of  care  and 
thoroughness.  The  New  York  problem  is  much  more  complex 
than  that  of  California.  The  multiplicity  of  corporation  taxes 
at  varying  rates  and  upon  different  bases  makes  the  difficulties 
of  a  similar  study  for  New  York  almost  insurmountable.  We 
have,  however,  sufficient  data  to  justify  a  rough  comparison 
between  New  York  and  California  and  between  New  York  and 
states  like  Minnesota  and  Michigan  that  have  also  made  studies 
similar  to  that  of  California.  These  comparisons  all  indicate 
that  the  disparity  as  between  agriculture  and  other  forms  of 
wealth  is  even  greater  in  New  York. 

An  examination  of  Minnesota's  experience  is  pertinent.  The 
following  facts  are  gathered  from  the  experience  of  Minnesota 
as  it  appears  in  the  1908  Report  of  the  State  Tax  Commission 
of  Minnesota  (p.  54-5)  : 

The  special  commission  on  revenue  and  taxation  of  1906  ap- 
pointed by  the  governor  of  California  declared  that  the  per- 
centage of  taxes  to  the  gross  products  for  manufactures  in  that 
state  was  .346,  or  about  ^  of  i  per  cent;  for  agriculture  the 
relation  of  taxes  to  total  product  was  6.86  per  cent.  On  the 
net  product  of  manufactures  the  commission  found  the  relation 
of  taxes  to  be  2.01  per  cent,  and  for  agriculture  9.88  per  cent. 
The  basis  of  these  figures  is  the  United  States  census  of  1900. 
Applying  the  same  methods  and  the  same  data  to  Minnesota,  a 


242  SELECTED   ARTICLES 

somewhat  different  result  is  obtained.  Expressed  in  the  terms 
of  product,  the  percentages  of  taxes  to  the  returns  secured 
from  manufacturing  and  agriculture  are  as  follows : 

Taxes  to  gross  product — Manufacturing    3223% 

Taxes  to  gross  product — Agriculture  4.7200% 

Taxes  to  net  product — Manufacturing    2.0480% 

Taxes  to  net  product — Agriculture    6.8850% 

TABLE  SHOWING  COMPARISON  OF  AGGREGATES  AND  PERCENTAGES  OF  INVEST- 
MENTS IN  MANUFACTURE  AND  AGRICULTURE  IN  MINNESOTA 

Aggregates  Percentages 

Capital  Items  Manufactures  Agriculture  Manufactures    Agriculture 

Land    $29,548,954        $559, 301,900  17.810  70.90 

Buildings    19,850,136          110,220,415  11,980  13-97 

Machinery    37,953,943  30,099,230  22.886  3.83 

Other   assets    78,479,213  89,063,097  47.324  11.30 


Total  capital. ..  .$165,832,246        $788,684,642  100.00  100.00 

The  assessed  value  of  manufactures  was  $32,509,514,  and 
of  agriculture  $299,567,765.  Reduced  to  percentages,  the  rela- 
tion of  the  assessment  of  manufactures  to  capital  was  19.6  per 
cent,  and  of  agriculture,  37.9  per  cent.  The  manufactures  paid 
$846,570  in  taxes  and  agriculture  $7,609,021 ;  in  other  words, 
.51  per  cent  and  .96  per  cent,  respectively,  of  their  capital 
values.  The  gross  product  of  the  manufacturers  of  the  State 
amounted  to  $262,655,881,  or  158.3  per  cent  of  the  capital  in- 
vested in  manufactures,  and  the  agricultural  product  was 
$161,217,304,  or  20.4  per  cent  of  the  capital  invested.  In  the 
case  of  the  net  product,  the  manufactures  of  the  state  earned 
$41,318,363,  or  24.9  per  cent  on  their  capital,  and  agricultural 
interests  $111,050,884,  or  14.08  per  cent. 

Manufacturers  pay  a  little  more  than  2  per  cent  on  their  net 
product,  and  farmers  pay  more  than  three  and  one-third  times  as 
much  as  when  measured  on  the  same  basis ;  and  on  the  basis  of 
gross  product  the  farmer  pays  more  than  eleven  and  one-half 
times  the  amount  turned  in  by  the  manufacturer  for  taxes.  On 
a  net  income  basis  the  manufacturer  pays  2  per  cent  of  it  for 
taxes,  but  the  farmer  pays  nearly  7  per  cent  of  his  net  income, 
which  includes  the  benefits  he  receives  from  his  garden,  poultry, 
etc.  And,  further,  the  farmer's  net  income  includes  his  reward 
for  management  as  well  as  interest  return.  These  items  make 
the  difference  still  more  marked. 

These  are  eloquent  figures.  While  the  commission  is  not 
ready  to  accept  them  in  their  full  meaning  as  conclusive,  they  do 
show  clearly  the  general  situation. 


TAXATION 


243 


The  experience  of  Michigan  is  also  of  much  value,  although 
the  disparity  between  farms  and  manufactures  is  probably  not  so 
great  as  it  is  in  the  state  of  New  York.  The  following  table  is 
taken  from  the  1911  Report  of  the  Commission  of  Inquiry  into 
Taxation  of  Michigan  (p.  9). 

It  gives  the  rate  of  taxes  per  thousand  of  actual  value  for 
farms,  banks,  residence,  railroads,  manufacturing  corporations, 
public  service  corporations  and  mines.  It  also  gives  a  comparison 
of  the  value  and  taxes  paid  by  each  of  these  classes  except 
residences : 


Values 

Taxes 

Rate 
per  $1,000 
$14.85 

10.00 

17.00 
20.65 

20.67 

5.31 

7.00 

7.OO 

$1,000,000,000 

75,000,000 
212,000,000 

24,000,000 
750,000,000 
250,000,000 

no.ooo.ooo 

$10,000,000 

1,250,000 
4,378,000 

493,000 
3,938,000 
1,750,000 

ooo.ooo 

Banks  and  trust  compar 

lies 

Sleeping  car,   express, 
and     telephone     and 
companies  

car   loaning 
telegraph 

Manufactures        .  .    . 

Electric  railway,  power 
and  eras  companies.  . 

,  heat,  light 

An  examination  of  this  table  discloses  the  fact  that  manufac- 
tures bear  the  lowest  rate  of  taxation  of  any  class  of  wealth  in 
Michigan,  this  rate  being  about  one-fifth  of  that  of  the  public 
service  corporations,  about  one-half  that  of  farm  property  and 
about  one-third  that  of  city  real  estate.  This  table  is  of  value  in 
so  far  as  it  throws  light  upon  the  disproportion  of  the  tax 
burden.  It  should  be  clearly  borne  in  mind,  however,  that  the 
disproportion  between  manufactures  and  farms  is  very  much 
less  than  in  either  California  or  New  York. 

In  view  of  the  great  inequality  as  between  the  actual  assess- 
ment of  farmers  and  manufacturers,  it  is  of  considerable  interest 
to  know  whether  any  compensation  is  found  in  the  difference  in 
their  tax-paying  ability.  The  following  quotation  from  page  66 
of  the  1906  California  Report  is  very  clear  upon  this  point: 

The  same  facts  may  be  exhibited  in  another  way.  After  allowing 
$2,446,238  for  the  average  annual  increase  in  value  of  farm  property 
and  taking  6  per  cent  as  interest  on  the  value  of  farm  property,  the 
census  estimates  that  the  145,801  persons  engaged  in  agriculture  earned 
an  average  of  $499.70  in  1899.  The  113,155  persons  engaged  in  manu- 
factures earned  an  average  of  $870. 

It  would  seem,  then,  that  from  the  per  capita  earnings  manufacturers 
could  afford  to  pay  nearly  75  per  cent  more  taxes  than  could  the  farmers. 
As  a  matter  of  fact,  however,  the  farmers  pay  10  per  cent  of  their  net 
earnings  and  manufacturers  only  2  per  cent  of  their  net  earnings. 


244  SELECTED   ARTICLES 

The  present  personal  property  tax  works  a  severe  hardship 
upon  the  property  of  farmers,  irrespective  of  whether  the  tax  is 
rigidly  enforced  or  not.  If  the  tax  is  actually  enforced  upon 
the  personalty  of  farmers  it  obviously  lays  a  highly  dispropor- 
tionate burden  upon  that  part  of  the  farmer's  wealth.  In  an- 
swer to  this  statement  it  is  often  said  that  the  personal  property 
tax  does  not  discriminate  against  the  farmer  inasmuch  as  the 
average  assessor  does  not  actually  assess  any  considerable 
amount  of  the  tangible  personalty  found  upon  farms.  It  is  true 
that  to  the  extent  that  an  individual  farmer  is  underassessed 
by  the  local  tax  officer  he  escapes  a  certain  part  of  a  highly 
disproportionate  burden.  It  is  utterly  fallacious,  however,  to 
infer  that  in  escaping  to  this  extent  the  farmer  is  freed  from 
the  inequities  of  the  personal  property  tax.  The  greatest  in- 
justice to  the  farmer  arises  from  the  indirect  results  of  the 
almost  complete  failure  of  the  general  property  tax  as  applied 
to  personalty  in  general.  When  practically  one-half  of  the 
tax  base  escapes  in  the  form  of  personalty,  the  rate  upon  the 
remaining  half  must  be  double  what  the  rate  would  be,  were 
it  levied  uniformly  upon  the  entire  base.  To  the  extent,  there- 
fore, that  anyone's  wealth  is  composed  of  real  estate,  to  just 
that  extent  does  he  bear  an  increased  disproportionate  share  of 
the  tax  burden. 

A  reference  to  the  above  tables  from  the  California  report 
is  illuminating  at  this  point.  The  first  table  shows  that  79  per 
cent  of  the  total  value  of  agriculture  is  invested  in  land  and  that 
88.7  per  cent  is  invested  in  land  and  buildings.  Manufactures, 
on  the  other  hand,  have  invested  in  land  only  16.9  per  cent  of 
total  capital  and  only  27.9  per  cent  in  land  and  buildings.  Per- 
sonalty of  manufactures  makes  up  72.1  per  cent,  of  which  not 
less  than  50  per  cent  is  intangible.  The  significance  of  these 
figures  must  not  be  overlooked.  They  show  not  only  that  that 
part  of  the  fair  share  of  personalty  escaping  taxation  is  borne  to 
a  very  large  degree  by  agriculture,  but  that  that  particular  bur- 
den is  partly  accounted  for  by  the  failure  of  the  assessors  to 
reach  the  very  large  per  cent  of  the  capital  of  manufacturing 
and  other  corporations  that  is  represented  by  personalty. 

It  must  not  be  understood  that  manufactures  represent  the 
only  group  of  wealth  that  shoves  off  part  of  its  tax  burden  upon 
the  farmer.  The  manufacturing  industry  has  been  used  for  pur- 
poses of  illustration,  and  did  space  permit,  it  could  be  shown 


TAXATION  245 

that  other  business  corporations  as  well  as  some  of  the  public 
service  and  financial  corporations  fail  to  bear  a  tax  burden 
proportionately  as  heavy  as  that  of  agriculture. 

In  answer  to  the  above  arguments  it  is  often  said  that  the 
farmer  suffers  no  injustice  because  as  his  tax  burden  increases, 
the  value  of  his  land  increases.  Wherever  the  increase  in  value 
of  this  land  assumes  the  form  of  the  so-called  "unearned  incre- 
ment," this  fact  may  be  true  in  those  particular  cases  in  which 
the  increment  is  as  large  as  the  tax  increase.  In  those  cases, 
however,  where  the  increased  value  of  the  farm  has  been  due 
to  the  labor  and  capital  investment  of  the  farmer,  it  cannot 
be  truthfully  said  that  the  increased  value  "takes  care  of"  the 
increase  in  the  tax  burden.  In  any  case  where  the  property  has 
not  increased  in  value,  the  increased  burden  is  a  heavy  one. 

In  summing  up  the  case  of  the  farmer,  the  evidence  is  well 
nigh  overwhelming  that  the  general  property  tax  in  so  far  as  it 
pertains  to  personalty,  directly  or  indirectly,  imposes  on  him 
an  increasingly  disproportionate  burden. 

5.  Injustice  as  between  various  types  and  classes  of  enter- 
prises. As  the  personal  property  tax  is  now  levied  in  New 
York,  it  constitutes  not  only  a  serious  impediment  to  the 
development  of  some  businesses,  but  a  constant  annoyance  to 
many  branches  of  business.  It  is  unjust  as  between  various 
units  of  business  and  types  of  corporations.  It  is  unjust  as 
between  mercantile  and  manufacturing  corporations  and  it  is 
unfair  to  corporations  within  the  same  group.  The  extreme  to 
which  this  unfairness  is  carried  is  illustrated  by  the  ridiculous 
differences  in  the  percentage  of  personalty  assessment  to  total 
assessment  in  the  same  counties.  In  the  same  type  of  business, 
the  ratio  of  personalty  to  realty  sometimes  varies  from  I  to  2,  to 
I  to  75.  In  the  same  town  the  personalty  of  manufactures 
escapes  while  the  personalty  of  mercantile  corporations  is  as- 
sessed. Moreover,  local  mercantile  corporations  are  taxed  upon 
personalty,  while  foreign  corporations,  doing  large  business  next 
door  and  carrying  large  stocks  of  personalty,  are  taxed  neither 
in  the  locality  nor  at  their  domicile. 

The  unfairness  as  between  manufacturing  corporations  of 
nearby  competing  towns  is  often  very  great.  In  fact  the  present 
investigation  discloses  the  fact  that  in  general  throughout  the 
state  of  New  York  the  personal  property  tax  bears  to  business 
the  relation  of  an  unmitigated  nuisance.  Were  the  law  fully 
enforced,  it  would  drive  business  out  of  New  York;  with 


246  SELECTED   ARTICLES 

present   sporadic   enforcement   it   falls   with   inequality   and   in- 
justice. 

6.  As  between  the  various  counties  in  New  York  State. 
Reference  to  the  comparative  statistical  tables  in  the  appendix 
will  show  with  what  wide  difference  personalty  is  actually 
assessed  in  the  different  counties  of  the  state.  When  the  direct 
state  tax  is  levied,  the  inequalities  in  the  assessment  of  real 
estate  are  partly  remedied  by  equalization.  With  personalty, 
however,  all  inequalities  remain,  because  the  board  of  equalization 
does  not  equalize  personal  property,  but  accepts  the  returns  of 
the  various  counties.  Thus  the  more  efficient  the  personal 
property  tax  is  levied  in  any  county,  the  higher  the  percentage 
of  the  direct  state  tax  that  county  is  required  to  pay.  In 
other  words,  the  present  law  penalizes  every  county  in  proportion 
to  its  efficiency  in  enforcing  the  law. 


THE  PROPOSED  PERSONAL  INCOME  TAX  1 

The  first  decision  reached  by  the  committee  was  that  in 
the  proposed  model  system  of  state  and  local  taxation  there 
should  be  a  personal  tax  levied  with  the  exclusive  view  of 
carrying  out  the  principle  that  every  person  having  taxable 
ability  should  pay  a  direct  tax  to  the  government  under  which 
he  is  domiciled.  There  appeared  to  be  four  forms  of  personal 
taxation  which  have  been  employed  for  this  purpose. 

The  first  of  these  is  the  poll  tax.  It  is  evident,  however, 
from  the  nature  of  the  case  that  this  tax  would  be  utterly  in- 
adequate to  accomplish  the  object  in  view,  even  if  levied  at 
graduated  rates,  as  has  sometimes  been  done  in  other  coun- 
tries. It  would  be  so  unequal  and  so  far  inferior  to  the  other 
forms  of  personal  taxation  that  it  cannot  be  deemed  worthy  of 
serious  consideration.  Whether,  as  a  supplement  to  an  ade- 
quate system  of  personal  taxation,  it  might  be  desirable  to 
retain  the  poll  tax  as  a  means  of  insuring  some  contribution 
from  people  owning  no  property  and  having  small  incomes, 
the  committee  preferred  not  to  consider  in  this  report.  It  has 
been  our  desire  to  confine  ourselves  to  main  issues,  and  not  to 

1  From  the  Report  of  the  committee  appointed  by  the  National  Tax 
Association  to  prepare  a  plan  of  a  model  system  of  state  and  local  taxa- 
tion, p.  10-19. 


TAXATION  247 

undertake  to  solve  every  minor  problem  of  taxation.  We, 
therefore,  say  nothing  about  the  poll  tax,  except  that  it  is  in- 
adequate for  the  purpose  that  we  have  in  view,  and  cannot  be 
recommended  as  an  important  element  in  any  system  of  state 
and  local  taxation. 

The  second  method  of  imposing  the  personal  tax  would  be 
to  levy  a  tax  upon  every  man's  net  fortune,  that  is,  upon  the 
total  of  his  assets  in  excess  of  his  liabilities,  without  exemption 
of  any  kind  of  asset  or  exclusion  of  any  liability.  This  would 
not  mean  a  general  property  tax,  but  a  net  property  tax  such  as 
is  found  in  some  countries  in  Europe.  It  would  be  a  tax  levied 
not  upon  property  as  such,  but  upon  net  fortune  as  a  measure 
of  the  citizen's  personal  liability  to  contribute  to  the  government 
under  which  he  is  domiciled.  It  would  be  entirely  distinct  from 
any  tax  that  might  be  levied  objectively  upon  property,  as  prop- 
erty, at  the  place  of  its  situs,  and  would  have  to  be  levied  exclu- 
sively upon  the  property  owner  at  his  place  of  domicile.  "It 
would  necessarily  be  levied  at  a  moderate  rate,  perhaps  $3  per 
$1000,  which  would  correspond  approximately  to  a  6  per  cent 
income  tax  upon  investments  yielding  5  per  cent.  Although 
precedents  may  be  found  in  other  countries  for  such  a  personal 
tax  levied  upon  net  fortunes,  the  committee  has  concluded  that 
it  is  not  to  be  recommended  for  adoption  in  the  United  States. 
Such  a  tax  would  raise  the  difficult  constitutional  question  of 
the  right  of  a  state  to  levy  a  tax  even  upon  the  net  fortune  of  a 
'citizen  if  that  fortune  included  tangible  property  located  in  an- 
other commonwealth.  It  is,  furthermore,  foreign  to  American 
experience,  and  would  certainly  not  lead  us  along  the  line  of 
least  resistance.  Since  the  coming  of  the  federal  income  tax,  it 
is  obvious  that  it  is  easier  for  the  states,  and  more  convenient 
for  the  taxpayers,  to  adopt  income  rather  than  net  fortune  as 
the  measure  of  the  obligation  of  the  citizen  to  contribute  to  the 
government  under  which  he  lives. 

The  third  method  of  personal  taxation  is  what  may  be  called 
a  presumptive  income  tax,  that  is,  a  tax  levied  upon  persons  ac- 
cording to  certain  external  indicia  which  are  taken  to  be  satis- 
factory measures  of  taxable  ability.  House  rent  is  the  index 
commonly  used  in  such  presumptive  income  taxes,  and  a  tax  on 
rentals  has  been  proposed  in  times  past  by  special  commissions 
in  Massachusetts  and  New  York.  Such  a  tax  would  be  com- 
paratively easy  to  administer,  and  would  raise  no  difficult 


248  •  SELECTED   ARTICLES 

constitutional  questions.  It  would  undoubtedly  be  better  than  an 
income  tax  or  a  tax  on  net  fortunes  if  those  taxes  were  badly  ad- 
ministered. But  the  amount  that  a  citizen  pays  for  house  rent 
is  after  all  such  a  very  imperfect  and  inadequate  indication  of 
his  income  or  fortune  that  the  committee  is  unwilling  to  recom- 
mend it  to  any  state  in  which  there  is  any  reasonable  expecta- 
tion that  conditions  are,  or  may  presently  become,  favorable  for 
the  introduction  of  a  better  form  of  personal  tax.  It  appears 
that  in  France,  where  the  tax  on  rentals  has  been  in  continuous 
operation  since  the  Revolution,  there  is  so  little  correspondence 
between  house  rents  and  taxable  ability  that  in  the  greater  part 
of  the  communes  the  taxing  officials  disregard  to  a  greater  or 
less  extent  the  letter  of  the  law,  and  assess  people  according  to 
what  they  appear  able  to  pay.  The  committee  finds,  therefore, 
that  the  tax  on  rentals  is  not  to  be  recommended  except,  per- 
haps, as  a  last  resort  in  states  where  administrative  and  other 
conditions  are  unfavorable  to  the  introduction  of  any  better 
form  of  personal  taxation. 

There  remains  a  fourth  form  of  personal  taxation,  the  per- 
sonal income  tax.  By  this  is  meant  a  tax  levied  upon  persons 
with  respect  to  their  incomes  which  are  taxed  not  objectively 
as  incomes  but  as  elements  of  determining  the  taxable  ability  of 
the  persons  who  receive  them.  This  tax  is  better  fitted  than 
any  other  to  carry  out  the  principle  that  every  person  having 
taxable  ability  shall  make  a  reasonable  contribution  to  the 
support  of  the  government  under  which  he  lives.  It  is  as  fair 
in  principle  as  any  tax  can  be;  under  proper  conditions,  it  can 
be  well  administered  by  an  American  state,  as  Wisconsin  and 
Massachusetts  have  proved ;  it  is  a  form  of  taxation  which 
meets  with  popular  favor  at  the  present  time,  and  therefore 
seems  to  offer  the  line  of  least  resistance.  The  committee,  there- 
fore, is  of  the  opinion  that  a  personal  income  tax  is  the  best 
method  of  enforcing  the  personal  obligation  of  the  citizen  for 
the  support  of  the  government  under  which  he  lives,  and  recom- 
mends it  as  a  constituent  part  of  a  model  system  of  state  and 
local  taxation. 

While  it  is  impossible  in  this  report  to  describe  the  proposed 
taxes  in  every  detail,  it  is  essential  that  the  committee  should  ex- 
plain at  least  in  broad  outlines  the  manner  in  which  these  taxes 
should  be  levied.  In  so  doing  it  will  be  necessary  to  refer  con- 
stantly to  the  general  principles  previously  stated,  and  to  adjust 


TAXATION  240 

the  details  of  each  tax  in  such  a  manner  as  to  enable  it  to  carry 
into  effect  logically  and  consistently  the  principle  upon  which  it 
is  based. 

Since  the  purpose  of  the  personal  income  tax  is  to  enforce 
the  obligation  of  every  citizen  to  the  government  under  which 
he  is  domiciled,  it  is  obvious  that  this  tax  must  be  levied  only 
upon  persons  and  in  the  states  where  they  are  domiciled.  It  is 
contrary  to  the  theory  of  the  tax  that  it  should  apply  to  the  in- 
come from  any  business  as  such,  or  apply  to  the  income  of  any 
property  as  such.  The  tax  should  be  levied  upon  persons  in  re- 
spect of  their  entire  net  incomes,  and  should  be  collected  only 
from  persons  and  at  places  where  they  are  domiciled.  It  should 
not  be  collected  from  business  concerns,  either  incorporated  or 
unincorporated,  since  such  action  would  defeat  the  very  purpose 
of  the  tax. 

At  first  thought  this  proposal  will  doubtless  seem  objection- 
able to  many,  who  will  ask  why  a  state  should  not  tax  all  in- 
comes derived  from  business  or  property  located  within  its 
jurisdiction,  irrespective  of  whether  the  recipients  are  residents 
or  non-residents.  And  if  the  personal  income  tax  were  the  only 
one  proposed,  the  objection  would  be  well  grounded.  The  com- 
mittee, however,  is  under  the  necessity  of  reconciling  the  conflict- 
ing claims  of  the  states,  and  of  doing  so  in  a  manner  that  will 
avoid  unjust  double  and  triple  taxation  of  interstate  business 
and  investments.  We,  therefore,  propose  as  the  only  practicable 
remedy  a  system  which  comprises  three  taxes,  each  of  which  is 
designed  to  satisfy  fully  and  fairly  the  legitimate  claims  of  our 
several  states.  We  are  elsewhere  providing  methods  by  which 
property  will  be  taxed  where  located  and  business  will  be  taxed 
where  it  is  carried  on.  At  this  point,  we  are  dealing  exclusively 
with  a  personal  tax  designed  to  enforce  the  right  of  our  states 
to  tax  all  persons  domiciled  within  their  jurisdictions;  and  we 
are  merely  insisting  that,  in  enforcing  this  claim,  the  states  shall 
act  consistently,  and  shall  confine  personal  taxation  to  persons 
and  attempt  to  levy  it  only  at  the  place  of  domicile.  If  the  per- 
sonal income  tax  is  levied  in  any  other  way,  it  will  simply  re- 
produce and  perpetuate  the  old  evil  of  unjust  double  taxation 
of  interstate  property  and  interstate  business. 

The  second  detailed  recommendation  we  have  to  make  is 
that  the  personal  income  tax  shall  be  levied  in  respect  of  the 
citizen's  entire  income  from  all  sources.  Under  existing 


250  SELECTED  ARTICLES 

constitutional  limitations,  of  course,  interest  upon  the  bonds  of 
the  United  States  and  the  salaries  of  federal  officials  cannot 
be  taxed  by  the  states,  but  we  recommend  that  all  other  sources 
of  income  be  subject  to  the  income  tax  without  exception  or 
qualification.  We  are  aware  that,  under  the  unreasonable  and 
unworkable  requirements  of  the  general  property  tax,  it  has 
appeared  desirable  in  times  past  to  exempt  state  and  local  bonds 
from  taxation,  to  exempt  real  estate  mortgages,  and  to  grant 
various  other  exemptions.  All  such  exemptions  are  inconsistent 
with  the  theory  of  the  tax  we  here  propose,  and  should  be  dis- 
continued as  rapidly  as  the  circumstances  of  each  case  permit. 
Against  the  policy  which  led  to  these  exemptions  under  the 
general  property  tax  we  here  offer  no  criticism.  But  we  are 
now  dealing  with  a  tax  which  is  designed  to  be  a  part  of  a 
new  system  of  taxation,  and  it  is  evident  that  none  of  the 
considerations  which  led  to  the  exemptions  created  under  the 
general  property  tax  are  applicable  to  a  personal  income  tax 
levied  upon  the  principle  we  here  advocate.  The  personal 
obligation  of  the  citizen  to  contribute  to  the  support  of  the 
government  under  which  he  lives  should  not  be  affected  by  the 
form  his  investments  take,  and  to  exempt  any  form  of  invest- 
ment can  only  bring  about  an  unequal,  and  therefore  an  unjust 
distribution  of  this  tax.  Our  reasoning  applies,  of  course,  to 
the  exemption  which  agencies  of  the  federal  government  now 
enjoy.  But  that  is  a  matter  which  is  beyond  the  control  of 
the  states,  and  for  the  purposes  of  this  report  it  will  be  con- 
sidered a  fixed  datum  which  must  be  accepted.  x 

Our  third  specific  recommendation  is  that  the  personal  in- 
come tax  should  be  levied  upon  net  income  defined  substan- 
tially as  a  good  accountant  would  determine  it.  We  submit 
no  formal  definition  at  this  time,  and  content  ourselves  with 
referring  to  the  provisions  of  the  Wisconsin  and  the  Massa- 
chusetts income  taxes.  Our  recommendation  means  that  oper- 
ating expenses  and  interest  on  indebtedness  must  be  deducted, 
but  we  wish  to  call  attention  to  the  fact  that  the  issue  by  the 
federal  government  of  large  amounts  of  bonds  which  are  exempt 

1  We  here  follow  the  view  that  has  long  prevailed  concerning  existing 
restrictions  on  the  taxing  power  of  the  states.  In  two  recent  cases  (Peck 
v.  Lowe  and  U.S.  Glue  Co.  v.  Oak  Creek,  247  U.S.)  the  court  has  de- 
veloped a  doctrine  which  may  justify  the  belief  that  a  net  income  tax, 
levied  upon  state  officials  along  with  all  other  persons,  with  respect  to 
their  entire  net  incomes,  might  not  be  held  to  be  a  tax  upon  agencies  of 
the  federal  government,  and  therefore  forbidden  by  federal  decisions. 


TAXATION  251 

from  local  taxation  will  make  it  necessary  for  the  states  to 
limit  the  interest  deduction  to  an  amount  proportional  to  the 
income  which  the  taxpayer  derives  from  taxable  sources.  This 
would  mean  that  if  a  person  derives  half  of  his  income  from 
taxable  sources  and  one-half  from  tax-exempt  federal  bonds, 
he  should  be  permitted  to  deduct  but  one-half  of  the  interest 
that  he  pays  upon  his  indebtedness.  Any  other  procedure  will 
tend  to  make  the  personal  income  tax  a  farce  in  many  cases  and 
will  give  occasion  for  legitimate  complaint. 

The  fourth  recommendation  relates  to  the  exemption  of 
small  incomes.  The  committee  believes  that  the  amount  of  in- 
come exempted  from  the  personal  income  tax  should  not  ex- 
ceed $600  for  a  single  person  and  $1200  for  a  husband  and 
wife,  with  a  further  exemption  of  $200  for  each  dependent 
up  to  a  number  not  to  exceed  three.  This  would  give  us  a 
maximum  exemption  of  $1,800  for  a  family  consisting  of  hus- 
band, wife,  and  three  children  or  other  dependents.  We  rec- 
ognize, however,  that  conditions  may  well  differ  in  various 
states,  and  have  decided  to  make  no  specific  recommendations 
about  the  amount  of  the  exemptions  granted  to  persons  hav- 
ing small  incomes.  We  limit  ourselves  to  the  above  statement 
of  the  maximum  exemptions  that  should  be  granted  and  the 
further  observation  that,  under  a  democratic  form  of  govern- 
ment, it  is  desirable  to  exempt  as  few  people  as  possible  from 
the  necessity  of  making  a  direct  personal  contribution  toward 
support  of  the  state. 1 

Our  fifth  recommendation  is  that  the  rate  of  the  income  tax 
shall  be  the  same  for  all  kinds  of  income,  that  is,  that  it  shall 
not  be  differentiated  according  to  the  sources  from  which  in- 
come is  derived.  If  the  tax  stood  by  itself,  a  strong  argument 
could  be  made  for  imposing  a  higher  rate  upon  funded  than 
upon  unfunded  incomes.  But  the  tax  is,  in  fact,  designed  to 
be  part  of  a  system  of  taxation  in  which  there  will  be  a  tax 
upon  tangible  property.  Under  this  system  there  will  be  heavier 
taxation  of  the  sources  from  which  funded  incomes  are  derived ; 
and  there  will,  therefore,  be  little  if  any  ground  for  attempting 
to  differentiate  the  rates  of  the  personal  income  tax.  Such 
differentiation,  furthermore,  would  greatly  complicate  the 

1  For  administrative  convenience  we  recommend  that,  in  order  to  mini- 
mize the  number  of  very  small  tax  bills,  no  person  liable  to  pay  an  income 
tax  shall  be  assessed  for  less  than  $1.00. 


252  SELECTED   ARTICLES 

administration  of  the  tax,  and  would  lead  to  numerous  difficulties. 
Upon  all  accounts,  therefore,  we  recommend  that  there  shall 
be  no  differentiation  of  the  rate. 

In  the  sixth  place,  we  recommend  that  the  rates  of  taxation 
shall  be  progressive,  the  progression  depending  upon  the  amount 
of  the  taxpayer's  net  income.  Concerning  the  precise  schedule 
of  rates,  we  offer  certain  general  recommendations.  The  low- 
est rate  should  not  be  less  than  I  per  cent,  and  under  present 
conditions  we  regard  it  as  inexpedient  for  any  state  to  impose 
a  rate  higher  than  6  per  cent.  The  classes  of  taxable  income 
to  which  the  various  rates  apply  need  not  be  smaller  than 
$1,000,  and  probably  should  not  be  larger.  It  results  from 
what  has  been  said  that  if  the  exemption  to  a  single  person 
be  placed  at  $600,  we  would  recommend  a  tax  of  i  per  cent 
upon  any  amount  of  income  between  $600  and  $1,600;  a  tax  of 
2  per  cent  upon  any  amount  of  income  between  $1,600  and  $2,600; 
a  tax  of  3  per  cent  upon  any  amount  of  income  between  $2,600 
and  $3,600;  a  tax  of  4  per  cent  upon  any  amount  of  income 
between  $3,600  and  $4,600;  a  tax  of  5  per  cent  upon  any  amount 
of  income  between  $4,600  and  $5,600;  and  a  tax  of  6  per  cent 
upon  all  income  in  excess  of  $5,600.  We  present  these  figures 
merely  for  the  purpose  of  illustrating  our  preferences,  and 
make  no  definite  recommendation  except  that  the  rates  of  the 
personal  income  tax  should  be  moderate,  and  should  be,  as  nearly 
as  practicable,  uniform  throughout  the  United  States. 

Our  seventh  suggestion  concerns  the  administration  of  the 
proposed  tax.  No  argument  can  be  needed  by  the  National  Tax 
Association  to  support  our  recommendation  that  the  administra- 
tion of  the  personal  income  tax  should  be  placed  in  the  hands 
of  state  officials.  This  we  regard  as  an  indispensable  condition 
for  the  successful  operation  of  any  state  income  tax,  and  we 
should  be  disinclined  to  recommend  the  adoption  of  an  income 
tax  by  any  commonwealth  that  is  unwilling  to  turn  over  its  ad- 
ministration to  a  well  organized  and  properly  equipped  state 
department.  Local  administration  of  an  income  tax  has  never 
worked  well,  and  in  our  opinion,  never  can  operate  satisfactorily. 
It  is  obvious,  finally,  that  a  state  tax  commission,  or  commis- 
sioner, is  the  proper  agent  to  administer  the  proposed  tax ;  and 
we  desire  to  record  our  belief  that  satisfactory  results  are  hardly 
to  be  expected  if  the  administration  is  turned  over  to  any  other 
state  officials.  Upon  this  whole  question  of  administration, 


TAXATION  253 

which  is  of  the  most  vital  importance,  we  are  fortunate,  in  being 
able  to  rely  upon  the  authority  of  the  opinions  repeatedly  ex- 
pressed by  the  conferences  of  the  National  Tax  Association. 
We  are  glad  also  to  point  to  the  experience  of  Wisconsin  and 
Massachusetts. 

Our  eighth  recommendation  is  that  the  personal  income  tax 
be  collected  from  taxpayers,  upon  the  basis  of  strictly  enforced 
and  controlled  returns,  and  without  any  attempt  to  collect  it  at 
the  source.  Upon  this  point  there  might  have  been  doubt  several 
years  ago.  But  the  experience  of  Wisconsin  and  Massachusetts 
shows  conclusively  that,  with  good  administration,  a  reasonable 
tax  upon  incomes  can  be  collected  in  the  manner  we  have  recom- 
mended, with  the  general  cooperation  of  the  taxpayers  and  with 
the  minimum  amount  of  evasion.  Collection  at  source  presents 
serious  administrative  difficulties,  imposes  unwarranted  burdens 
upon  third  parties  in  respect  of  transactions  which  strictly  con- 
cern only  the  taxpayers  and  the  government,  and  not  infre- 
quently tends  to  shift  the  burden  of  the  tax  to  the  wrong  should- 
ers. What  we  seek  is  a  personal  tax  which  shall  not  be  shifted 
and  shall  bring  home  to  the  taxpayer,  in  the  most  direct  possible 
form,  his  personal  obligation  for  the  support  of  the  government 
under  which  he  lives.  Collection  at  the  source  is  plainly  incon- 
sistent with  the  purpose  of  such  a  tax.  We  recommend,  how- 
ever, that  in  certain  cases  information  at  the  source  be  required 
as  is  now  done  under  the  Massachusetts  and  Wisconsin  income 
taxes.  Such  information  is  helpful  to  the  administrative  offi- 
cials, and  does  not  alter  the  incidence  or  otherwise  affect  in- 
juriously the  operation  of  a  personal  income  tax. 

The  only  remaining  point  is  that  of  the  proper  disposition 
of  the  proceeds  of  this  tax.  So  far  as  our  general  plan  of  taxa- 
tion is  concerned,  it  is  immaterial  whether  the  revenue  from 
the  personal  income  tax  is  retained  in  the  state  treasury,  dis- 
tributed to  the  local  political  units,  or  divided  between  the  state 
and  local  governments.  It  is  probable,  furthermore,  that  the 
same  solution  may  not  be  advisable  in  every  state.  If  the  state 
should  keep  the  entire  revenue,  then  every  section  of  the  state 
would  benefit  to  the  extent  that  such  revenue  might  reduce  the 
direct  state  tax.  Upon  the  other  hand,  if  the  revenue  from  the 
income  tax  is  distributed  wholly  to  the  local  units,  as  is  now  the 
case  in  Massachusetts,  the  lightening  of  local  burdens  tends  to 
reduce  the  pressure  of  the  direct  state  tax.  It  seems  probable 


254  SELECTED   ARTICLES 

that  in  most  cases  a  division  of  the  revenue  would  be  considered 
preferable;  and  in  such  cases  we  suggest  that  the  state  gov- 
ernments might  well  retain  a  proportion  corresponding  to  the 
proportion  which  state  expenditures  bear  to  the  total  of  the  state 
and  local  expenditures,  and  that  the  same  principle  should  apply 
in  determining  the  share  received  by  each  of  the  subordinate  po- 
litical units.  Thus  in  case  state  expenditures  amount  to  one- 
fifth  of  the  total,  county  expenditures  to  two-fifths,  and  mu- 
nicipal expenditures  to  two-fifths,  the  state  should  receive  one- 
fifth  of  the  revenue  from  the  income  tax,  the  counties  two-fifths, 
and  the  municipalities  two-fifths.  Whether  distribution  to  the 
local  units  should  be  made  upon  the  basis  of  the  amount  of  tax 
collected  in  each  unit,  or  whether  the  tax  should  be  distributed 
upon  some  other  basis,  is  also  immaterial  to  our  general  plan 
of  taxation.  In  states  where  domiciliary  changes  occurring 
under  the  general  property  tax  have  not  produced  an  unnatural 
concentration  of  wealth  in  certain  localities,  it  will  probably  be 
best  to  distribute  the  revenue  according  to  the  domicile  of  the 
taxpayers.  But  where,  as  in  Massachusetts,  under  the  operation 
of  the  general  property  tax,  wealth  has  been  greatly  concentrated 
in  a  few  localities,  such  a  method  of  distribution  is  obviously 
impossible  and  some  other  method  must  be  found.  In  such  a 
case,  the  income  tax  revenue  might  be  utilized  for  a  state  school 
fund,  or  might  be  distributed  among  the  localities  according  to 
the  proportions  in  which  they  are  required  to  contribute  to  the 
direct  state  tax.  Since  this  entire  question  of  distribution  must 
be  so  largely  affected  by  local  conditions,  the  committee  prefers 
to  do  no  more  than  to  offer  these  general  suggestions. 

WHAT  RIGID  ENFORCEMENT  WOULD  MEAN  t 

Tax  rates  and  valuations  are  determined  by  the  demand  for 
public  revenue.  Needs  for  public  revenues  in  Illinois,  as  in 
all  other  states,  are  increasing  constantly  with  the  new  demands 
which  are  being  made  upon  government. 

To  meet  these  demands  under  the  present  system,  present 
rates  must  be  increased  and  applied,  generally,  to  increased 
valuation  of  property  already  taxed.  With  proper  constitu- 

1  Civic  Federation  of  Chicago.     Taxation  and  Public  Finance,  p.   16-17. 


TAXATION  255 

tional  changes,  revenues  from  new  sources  derived  in  an  equit- 
able manner  by  methods  worked  out  in  other  states,  may  be 
reasonably  expected.  This  will  tend  not  only  to  relieve  from 
undue  share  of  the  prospective  increase,  property  already  taxed, 
but  to  equalize  the  future  burdens  between  property  which  now 
pays  heavily  and  property  which  pays  little  or  frequently 
nothing. 

Rigid  enforcement  of  the  present  system  sometimes  is  urged 
by  the  superficially  inclined  as  a  cure  for  present  inequalities. 
The  following  are  a  few  of  the  developments  which  would 
attend  a  real  attempt  at  rigid  enforcement : 

1.  Greatly    increased    and     probably    intensely    centralized 
powers  of   assessment  and  an  army  of  deputies  working  con- 
stantly throughout  the  year. 

2.  Heavy   penalties   with   provisions    for   rigid    enforcement 
against  delinquents. 

3.  An  inquisitorial  drag-net  by  which  the  assessors  would 
attempt  to  question  every  possible  holder  of  intangible  wealth. 

4.  Persons  having  no  taxable  property  would  be  put  to  the 
expense   and   inconvenience   of    establishing   their   innocence   of 
criminally  hiding  property. 

5.  Intangible  property  of  every  kind,  regardless  of  income- 
producing  ability,  would  have  to  pay  taxes  by  value  out  of  its 
net  income.     This  would  operate  to  create  higher  interest  rates, 
necessitating  greater  profits  from  all  real  property  and  increasing 
rents  and  the  cost  of  living. 

6.  Money  in  bank  would  be  taxed  at  a  rate  so  much  higher 
than  the  rate  of  exchange  that  it  would  go  to  more  favorable 
jurisdictions,    creating   financial   stringency   in    Illinois,   at    least 
during  the  assessment  period.     Already  this  tendency  has  been 
observed  in  some  parts  of  the  state. 

7.  Even  if  bank  runs  and  bank  closings  did  not  result,  the 
banks  would  be  compelled  to  pay  a  higher  rate  of  interest  on 
deposits  to  make  up  for  the  tax  rate,  and  this  would  increase 
the  interest  rate  on  all  sorts  of  loans. 

8.  A  confiscatory  tax  rate  even  more  than  now  would  be  a 
menace  confronting  every  prospective   investor   in   Illinois,   and 
to  many  times  the  extent  which  it  now  deters  new  capital  for 
purchase   of   existing  tangible  property    from   coming  into  this 
state,  it  would  operate  to  depreciate  all  values  of  all  intangible 


25&  SELECTED  ARTICLES 

property  by  diminishing  the  market  for  it.  Other  states  would 
profit  by  the  hegira  of  capital  from  Illinois,  and  this  state 
would  be  retarded  in  its  economic  growth  and  development. 

9.  Every  stick  of  furniture,  every  wash-boiler,  every  pick 
and  shovel  and  hammer  and  saw,  would  have  to  contribute  its 
mite,  regardless  of  petty  annoyance — and  frequent  hardships 
— on  the  part  of  thousands  of  individuals,  and  of  a  cost  of  assess- 
ment and  collection  far  exceeding  the  revenues  derived. 

Industrialism — employer  and  employee  alike — would  be  in- 
jured by  a  rigid  enforcement  of  the  present  uniform  property 
tax  system,  even  if  it  were  done  in  the  most  impartial  manner 
possible. 


BRIEF  EXCERPTS 

We  have  found  that  the  general  property  tax  is  a  failure,  for 
purposes  either  of  revenue  or  equality;  that  more  than  half  of 
the  total  wealth  of  the  state  in  tangible  property  alone  escapes 
taxation;  that  of  intangible  property,  such  as  moneys,  credits, 
stocks  and  bonds,  subject  to  taxation  under  existing  laws,  not 
10  per  cent  perhaps  not  even  5  per  cent  is  listed  on  the  dupli- 
cates. Report  of  the  Tax  Commission  to  the  Governor  of  Ohio 
1908.  p.  33. 

•f  Practically  the  general  property  tax,  as  actually  admin- 
istered today,  is,  beyond  all  peradventure,  the  worst  tax  known 
to  the  civilized  world.  .  .  It  puts  a  premium  on  dishonesty 
and  debauches  the  public  conscience.  It  reduces  deception  to  a 
system  and  makes  a  science  of  knavery;  it  presses  hardest  on 
those  least  able  to  pay.  It  imposes  double  taxation  on  one  and 
grants  immunity  to  the  next.  In  short,  the  general  property  tax 
is  so  flagrantly  inequitable  that  its  retention  can  be  explained 
only  through  ignorance  or  inertia.  Edwin  R.  A.  Seligman.  The 
General  Property  Tax.  p.  52. 

One  of  the  pertinent  observations  of  the  [Special  State  Tax] 
Commission  [of  California,  1905]  is  applicable  perhaps  to  every 
state.  It  is  on  the  steady  increase  of  tax  burdens.  "The  people 
continually  demand  more  and  more  of  the  various  branches  of 
the  Government  and  the  burden  upon  the  property  holders 


TAXATION  257 

increases  at  a  very  rapid  rate.  .  .  The  growth  in  the  burden  of 
taxation  has  been  much  more  rapid  than  the  growth  in  popu- 
lation." And  figures  are  given  showing  the  growth  of  popula- 
tion from  1860  to  be  4.3  fold,  while  taxation  increased  during  the 
same  period  9.2  fold.  Therein  lies  the  necessity  of  discovering 
new  sources  of  revenue,  and  sources,  too,  that  can  be  reached 
more  certainly  than  the  tax  on  personal  property,  particularly 
of  intangible  character.  The  Civic  Federation  of  Chicago.  A 
Summary  of  the  Reports  of  Special  State  Tax  Commissions, 
p.  10. 

A  survey  of  the  field  of  state  income  taxation  shows  that 
thirteen  states  have  income  tax  laws  in  some  form  upon  their 
statute  books.  The  laws  of  West  Virginia,  Montana  and  Con- 
necticut provide  for  business  taxes  on  the  net  income  of  corpor- 
ations only.  The  laws  of  Mississippi,  Missouri,  North  Dakota 
and  Delaware  are  so  recent  that  practical  results  are  not  ascer- 
tainable  at  this  time.  New  Mexico  has  made  no  attempt  to  apply 
her  law  which  was  repealed  by  the  legislature  in  1919,  but  the 
governor  vetoed  the  repealing  act.  Virginia  and  North  Carolina 
have  laws  which  are  a  survival  of  Civil  War  acts  and  have  not 
been  prolific  revenue  producers.  Oklahoma  has  a  law  with  the 
specific  exemption  so  high  that  the  receipts  are  materially  re- 
duced. New  York,  Massachusetts  and  Wisconsin  have  compre- 
hensive laws  which  have  shown  favorable  results.  Frank  D. 
Strader.  Proceedings  National  Tax  Association,  v.  13. 

Since  about  1885  there  has  been  a  marked  increase  in  state 
and  local  revenues  throughout  the  country  and  in  fact  through- 
out the  western  world.  This  growth  has  been  especially  marked 
during  the  last  dozen  years.  On  every  hand  the  complaint  is 
made  of  the  increasing  burden  of  taxation.  For  a  quarter  of  a 
century  writers  on  public  finance  have  called  attention,  some- 
times with  alarm,  to  the  growth  of  public  expenditures.  In  the 
main,  however,  this  increase  is  looked  upon  as  a  natural  growth. 
The  functions  of  government  have  been  constantly  widening;  all 
the  old  services  are  continued;  new  ones  are  constantly  being 
undertaken ;  and  new  and  old  are  being  conducted  on  a  higher 
plane  than  formerly.  Citizens  are  no  longer  content  with  mere 
room  and  convenience,  but  demand  something  of  elegance,  in 
their  public  buildings.  They  are  no  longer  satisfied  that  their 


258  SELECTED  ARTICLES 

duty  is  performed  toward  the  unfortunate  wards  of  the  state 
by  providing  them  shelter  and  food,  but  feel  impelled  to  make 
use  of  all  the  methods  of  modern  science  to  remove  their  ab- 
normalities and  restore  them  when  possible  to  the  usual  paths 
of  life.  Report  of  the  Special  Commission  on  Revenue  and  Taxa- 
tion. Nebraska.  1914.  p.  23. 

Income  taxes  in  almost  every  imaginable  form  have  been 
tried  i or  many  years  in  some  of  the  eastern  and  southern  states. 
The  following  is  a  rough  summary  ot  the  periods  for  which  in- 
come taxes,  in  some  form  or  other,  have  been  in  force  in  twenty 
of  the  states,  the  colonial  and  statehood  periods  being  combined: 

State  From  To 

Alabama   1844  1884 

Connecticut   1649  1819 

Delaware 1869  187 1 

Florida    1845  1855 

Georgia     1863  1866 

Kentucky  (as  to  U.  S.  Bonds) 1867  1871 

Louisiana  1865  19 10 

Maryland    1842  1850 

Massachusetts   1843  1910 

Missouri     1861  1866 

North  Carolina 1849  1910 

Oklahoma     1908  1910 

Pennsylvania     1841  1871 

Rhode   Island    1673  1750     (?) 

South  Carolina 1838  1868 

"        1898  1910 

Tennessee  (as  to  U.  S.  Bonds) 1883  1910 

Texas    1863  1871 

Vermont 1 777  1 782 

1778  1850 

Virginia    1843  1910 

West   Virginia          1863  1864 

(Where  the  year  1910  is  given  above,  the  intention  is  to  state  that 
the  law  is  not  yet  repealed.) 

K.  K.  Kennan,  Income  Taxation,  p.  209-10. 

The  first  of  the  modern  state  income  tax  laws  was  passed  by 
the  legislature  of  Wisconsin  in  1911.  In  this  state  the  move- 
ment for  an  income  tax  received  its  first  impetus  in  the  very 
general  dissatisfaction  which  had  been  aroused  by  the  inequi- 
table operation  of  the  property  tax  as  applied  to  personal  prop- 
erty. A  constitutional  amendment  authorizing  an  income  tax 
was  adopted  in  1908  by  a  large  majority.  A  tentative  measure 
was  introduced  in  1909  and  adopted  in  1911.  From  the  very 
outset  the  success  of  this  measure  was  in  such  marked  contrast 
with  the  earlier  state  experiences  that  a  number  of  states  have 


TAXATION  259 

since  resorted  to  this  form  of  taxation,  though  not  all  of  them 
have  seen  fit  to  follow  the  Wisconsin  law  in  its  most  distinctive 
features,  that  is,  its  administrative  methods  which,  more  than 
anything  else  have  made  it  successful. 

The  state  income  tax  laws  adopted  since  1911  have  been  the 
following,  which  is  a  complete  list  so  far  as  the  writer  can  dis- 
cover; West  Virginia,  Oklahoma,  Connecticut,  1915;  Massa- 
chusetts, 1916;  Missouri,  Delaware  and  Montana,  1917;  New 
York,  1917  and  1919.  Income  taxes  of  the  older  sort  are  still  in 
force  in  Virginia,  North  Carolina  and  Tennessee. 

The  income  tax  laws  of  the  past  eight  years  may  be  grouped 
into  two  classes,  on  the  basis  of  their  scope.  In  one  group  are 
those  laws  which  apply  to  incomes  of  every  sort,  as  in  Wiscon- 
sin and  New  York.  The  former  state  has  one  general  income 
tax  law,  the  latter  has  enacted  separate  acts  for  the  taxation  of 
individual  and  corporate  incomes.  The  other  group,  comprising 
all  other  states  having  income  tax  laws,  have  applied  these  laws 
to  a  limited  class  of  incomes.  In  Massachusetts,  Oklahoma, 
Delaware  and  Missouri,  the  tax  is  levied  on  the  income  of  in- 
dividuals only,  and  in  Massachusetts  the  scope  of  the  law  is 
further  confined  to  certain  classes  of  individual  income.  West 
Virginia,  Connecticut  and  Montana  levy  the  tax  upon  corporate 
incomes  only.  Harley  L.  Lutz.  Report  of  the  Special  Joint  Taxa- 
tion Committee  of  the  Sjd  Ohio  General  Assembly.  1919. 
p.  88 

The  Special  Joint  Committee  on  Taxation  and  Retrenchment 
was  instructed  by  joint  resolution  to  investigate  and  report  on 
the  possibility  and  the  methods  of  securing  retrenchment  in  gov- 
ernmental expenditures,  especially  in  the  cities  and  counties.  It 
was  found  that  the  running  expenses  of  state  and  local  gov- 
ernment in  the  state  of  New  York  for  1918  were  $436,000,000. 
For  1920  the  figure  cannot  be  below  $500,000,000,  or  approxi- 
mately $250  for  the  average  family  of  five.  It  was  also  found 
that  of  this  total  the  expenses  of  the  Stale  government  were  17 
per  cent,  the  remaining  83  per  cent  being  the  costs  of  city,  vil- 
lage, town  and  county  government. 

The  causes  for  this  marked  increase  in  the  costs  of  city  gov- 
ernment in  this  State  are : 

i.  The  very  rapid  increase  in  the  appropriations  devoted  to 
education 


26o  SELECTED  ARTICLES 

2.  The  extension  of    government  into  new  fields  of  activity, 
such    as    parks,    playgrounds,    nursing,    Americanization,    health 
education,  etc. 

3.  The  need  for  extended  city  improvements  partly  to  make 
up  for  the  long  period  of  inactivity  during  the  World  War  and 
partly  to  meet  the  new  standard  of  service  and  equipment  de- 
manded of  the  city  by  the  people. 

4.  The   expansion   of   municipal   services,   such   as   fire   and 
police,  to  render  more  and  better  service  in  response  to  popu- 
lar demands. 

5.  The    "enthusiasm    and    desire    of    department    heads    to 
render   greater   service"   and    to   expand   their   departments — as 
Mayor  Stone  of  Syracuse  put  it. 

6.  The  change  in  the  value  of  the  dollar  and  the  new  price 
level,    or   as    Mayor    Wallin   of    Yonkers    stated    it:    "You    are 
going  through  a  period  of  increased  expenditures  as  expressed 
in  dollars  but  not  an  actual  increase  when  you  consider  the  value 
of  the  dollar." 

7.  Inappropriate  and  poorly  functioning  governmental  organ- 
ization. 

8.  Inefficiency  and  waste.    Report  of  the  Special  Joint  Com- 
mittee on  Taxation  and  Retrenchment.  New  York.  1920.  p.  15-16. 


AFFIRMATIVE  DISCUSSION 


INCOME  TAX  1 

The  taxation  system  of  Michigan  is  based  on  an  ad  valorem 
general  property  tax,  administered  at  a  uniform  rate,  on  all  prop- 
erty not  specifically  taxed,  or  by  law  exempt. 

The  individual  who  studies  the  taxation  problems  of  Mich- 
igan with  the  statistics  of  recent  years  before  him,  cannot  fail 
to  be  impressed  with  the  importance  that  must  be  given  to  four 
general  conditions,  in  any  solution  that  may  be  suggested : 

First,  the  great  increase  in,  and  broadening  of,  the  purposes 
for  which  taxation  is  now  levied,  and  the  necessary  accompany- 
ing increase  in  the  volume  of  taxation; 

Second,  the  continuous  narrowing  in  the  base  sustaining  tax- 
ation ; 

Third,  the  changes  that  have  taken  place  in  the  character  of 
property  since  our  present  taxation  system  was  adopted,  and  the 
failure  at  the  present  time  of  the  ad  valorem  general  property 
tax  to  reach  and  equitably  tax  all  property; 

Fourth,  the  relative  importance  now  held  by  a  class  of  citi- 
zens whose  income  is  the  result  of  personal  effort  and  not  drawn 
from  capital  represented  by  any  form  of  property. 

Expanding  Demands  for  Revenue 

In  the  year  1909  the  total  amount  of  taxes  levied  in  Michigan 
under  the  ad  valorem  general  property  tax  law  for  all  purposes 
— state,  county,  school  and  municipal — was  in  round  numbers 
$34,879,000;  in  1917  it  had  increased  to  $73,612,000;  in  1918  to 
$85,132,000;  in  1919  to  $110,776,000.  The  records  for  1920  have 
not  yet  been  compiled,  but  from  the  reports  that  have  reached 
the  office  of  the  Board  of  State  Tax  Commissioners  it  is  certain 
that  for  the  present  year  it  will  exceed  $125,000,000.  It  must  be 
borne  in  mind  that  these  sums  do  not  include  taxes  paid  by 

1  Eleventh  Report  of  the  Michigan  Board  of  State  Tax  Commissioners 
and  State  Board  of  Assessors.  1920.  p.  25-46. 


262  SELECTED   ARTICLES 

public  utility  corporations  into  the  primary  school  fund,  or  the 
automobile  tax  paid  into  the  highway  fund,  or  inheritance  taxes, 
or  mortgage  taxes,  the  total  of  which  for  the  year  ending  June 
30,  1920,  was  $14,771,746. 

The  following  table,  comparing  taxes  levied  in  1909  and  1919, 
shows  an  increase  in  each  total  in  which  taxes  are  classified : 

ASSESSED  VALUATION   AND  TAXES  LEVIED  IN  THE  STATE  OF  MICHIGAN 

1909  1919 

Real  Estate    $1,315,627,624  $3,5i5,i43,38o 

Personal  Property   371,528,073  988,837,601 


Total    $1,687,155,697  $4,503,980,981 

State  Tax    $5,929,304.89  $17,432,512.04 

County  Tax 4,499,690.06  1 1,685,086. 15 

Township   Tax    1,150,268.21  2,101,786.11 

School  Tax    7,186,799.35  29,753,423.09 

Highway  Tax   3,014,344.94  8,658,775.66 

County  Road  Tax  741,868.05  5,124,191.47 

Drain  Tax   267,628.5 1  860,758.73 

City    Tax     10,791,845.46  31,587,226.22 

Village  Tax 1,291,173.47  3,557,909.69 

Rejected  Tax   6,170.26  14,436.94 

Total  Taxes   $34,879,093.20  $110,776,106.10 

Average  Rate  per  $1,000 $20.67  $24.60 

This  continuous  tremendous  increase  in  the  volume  of  taxa- 
tion is  not,  to  any  appreciable  extent,  the  result  of  waste,  ex- 
travagance or  mismanagement  and  is  due,  only  in  part,  to  the 
'increased  cost  of  living.  Rigid  economy,  consolidation  of 
(Boards,  efficient  budget  administration,  undoubtedly  will  ac- 
complish saving.  There  will  be,  also,  saving  through  recession 
in  prices  in  the  course  of  readjustment  from  war  conditions; 
but  in  considering  this  factor  it  must  be  recognized  that  for 
years  to  come,  prices  will  continue  on  a  considerably  higher 
plane  than  in  the  past. 

The  relief  which  we  may  expect  from  readjustment  in  prices 
and  saving  in  administration,  will,  we  believe,  be  more  than 
swallowed  up  by  constantly  increasing  expenditure  resulting 
from  the  continuous  increase  in,  and  broadening  of,  the  purposes 
for  which  taxation  is  now  and  will  be,  in  the  future,  levied.  The 
state,  the  counties,  the  municipalities,  even  the  smallest  local 
communities,  have  entered  upon  projects  of  development,  espe- 
cially with  respect  to  highways,  streets,  sewers,  schools,  public 
buildings,  parks,  etc.  that  will  continue  to  require  increased  mil- 
lions for  years  to  come.  These  projects  of  development,  it  should 


TAXATION  263 

be  noted,  are  financed,  only  partially,  by  present  day  taxation. 
The  main  reliance  is  upon  bond  issues  drawing  comparatively 
high  rates  of  interest,  and  in  the  future  the  interest  upon  these 
bonds,  as  well  as  the  principal  as  it  matures,  must  be  added  to 
the  annual  tax  levy. 

Expense,  that  is  reflected  in  the  annual  tax  levy,  follows  de- 
velopment in  lines  that  are  purely  industrial  or  commercial,  and 
in  no  way  connected  with  any  public  business.  For  illustration, 
note  the  cost  to  the  public  of  automobile  development.  The 
state-wide  program  of  highway  improvement,  now  calling  for  an 
annual  outlay  of  millions  of  dollars,  owes  its  rapid  advancement 
and  present  importance  very  largely  to  motor-vehicle  develop- 
ment. The  cost  of  constructing  improved  public  highways  has 
been  increased  to  three  and  four  times  the  cost  when  only  horse- 
drawn  vehicles  used  the  highways.  The  cost  of  maintenance 
after  construction,  as  compared  with  cost  in  former  years,  has 
increased  in  the  same  ratio.  The  cost  of  public  safety  and  ad- 
ministration of  justice  has  been  increased  because  of  traffic 
policemen,  motorcycle  squads,  recovery  of  stolen  machines,  and 
the  combating  of  new  forms  of  crime  practiced  by  the  auto 
bandit.  The  automobile  carries  the  sportsman  and  the  seeker 
after  health  and  recreation,  surely  and  in  ever  increasing  num- 
bers to  the  new  and  more  remote  parts  of  the  state,  putting  an 
increased  burden  upon  the  highways,  and  increased  pressure 
upon  public  lands  suitable  for  resorts,  and  upon  the  resources 
of  our  streams,  lakes  and  game  fields.  All  this  will  call  for  in- 
creased appropriations  for  the  establishment  and  maintenance  of 
public  parks  and  game  refuges,  for  fire  protection,  for  game  pro- 
tection, and  for  the  propagation  and  distribution  of  game  and 
fish. 

The  requirements  of  various  state  institutions,  especially 
those  concerned  with  education,  public  health,  safety,  and  wel- 
fare, always  have  been  generously  met  and,  because  of  the  na- 
ture of  the  appeal  they  make,  will  continue  to  receive  favorable 
consideration.  To  appreciate  the  increase  in  the  demands  of 
state  institutions,  compare  the  totals  now  declared  to  be  indis- 
pensable with  the  sums  required  by  these  institutions  a  few  years 
ago.  Note  also  that  the  increases  asked  for  at  this  time  are  not 
only  those  made  necessary  because  of  increased  cost  of  living 
and  increasing  population,  but  they  extend  to  new  plants  and 
new  outfits  declared  necessary  because  of  modern  theories  of 


264  SELECTED   ARTICLES 

construction,  sanitation  and  management,  and  if  not  now 
granted  must  be  in  the  near  future.  Note,  also,  that  these  con- 
ditions are  not  confined  to  state  institutions  but  extend  to  those 
of  the  counties  and  cities  as  -well. 

Another  condition  that  is  increasing,  directly  and  continu- 
ously, the  volume  of  taxation  is  the  tendency  of  the  various  po- 
litical units  of  the  state  to  take  over,  as  proper  and  necessary 
functions  of  government,  a  large  group  of  subjects  relating  to 
both  public  and  private  welfare  that,  until  a  few  years  ago,  were 
left  entirely  to  private  initiative  and  private  philanthropy;  or, 
if  in  operation  at  public  expense,  functioned  only  in  a  limited 
way.  These  subjects  range  from  the  visiting  nurse  and  public 
playgrounds  for  children,  to  tuberculosis  hospitals  and  mothers' 
pensions  for  adults.  They  relate  to  public  health,  sanitation, 
comfort,  recreation,  child  welfare  and  any  number  of  kindred 
subjects.  They  increase  in  number  and  scope  every  year,  and 
'each  new  feature  taken  over  calls  for  and  justifies  the  develop- 
'ment  of  some  other  feature  of  public  or  private  welfare  at  pub- 
lic expense.  No  one  will  see,  or  should  wish  to  see,  these  new 
functions  of  government  restricted.  The  world  is  now  in  a  new 
orbit  and  one  of  the  forces  that  will  tend  to  keep  it  balanced  in 
this  new  orbit  is  a  proper  and  continuous  development  in  public 
and  private  welfare  through  public  expenditure,  and  this  condi- 
tion necessarily  means  a  continued  increase  in  the  volume  of 
taxation. 

The  second  condition  to  which  we  have  referred — the  con- 
tinuous narrowing  in  the  base  of  taxation  sustaining  this  enor- 
mous constantly  increasing  volume  of  taxation — is  also  operat- 
ing as  certainly,  as  continuously  and  as  efficiently  as  is  the  con- 
dition of  constantly  increasing  volume  of  taxation. 

Contracting  Basis  of  Taxation 

The  base  of  taxation  in  Michigan  is  the  ad  valorem  general 
property  tax  law.  Contemporaneous  with  its  enactment  by  the 
Legislature,  that  body  began  the  process  of  cutting  away, 
through  the  granting  of  exemption  from  taxation,  and  it  has 
continued  the  practice  down  to  the  present  day.  The  laws  ex- 
empting property  from  taxation  are  being  constantly  added  to, 
and  they  have  a  tendency  to  widen  in  their  application,  and  they, 
more  and  more,  exempt  property  not  contemplated  to  be 


TAXATION  265 

exempted  by  those  originally  responsible  for  such  legislation.  The 
exemption  of  so  much  of  the  taxable  credits  of  a  taxpayer  as 
can  be  offset  by  his  debits,  without  regard  to  the  character  of 
the  debits  and  whether  taxable  or  not,  is  a  particularly  vicious 
form  of  tax  exemption.  Through  the  mortgage  tax  law  we  are 
continually  creating  non-taxable  credits  by  a  single  payment  of 
five  mills.  For  the  debtor  in  the  same  transaction  these  non- 
taxable  credits  are  legal  offsets  continuously,  year  after  year, 
against  money,  accounts,  unsecured  notes  or  other  forms  of 
credits  subject  to  taxation  at  the  full  rate  of  the  general  prop- 
erty tax.  The  narrowing  in  the  base  of  taxation  through  exemp- 
tion of  property  from  taxation  is  measured  by  hundreds  of  mil- 
lions of  dollars. 

Home  rule  and  municipal  ownership  of  public  utilities  is 
rapidly  and  to  an  alarming  extent  narrowing  the  base  of  tax- 
ation. Not  many  years  ago  municipalities  confined  their  efforts 
in  the  public  utility  field  to  such  necessary  public  service  as  did 
not  attract  private  capital,  such  as  a  municipal  water  system 
and  public  lighting.  Private  investment  in  public  utilities  was 
encouraged  and  became  a  fruitful  and  constantly  increasing 
source  of  public  revenue  through  taxation.  Now,  all  is  changed 
and  such  services  as  private  lighting,  power,  heat  and  transpor- 
tation are  considered  public  functions  and  are  being  established 
under  municipal  ownership,  and  a  tendency  to  take  over  activ- 
ities of  this  character  now  in  private  ownership  is  increasing 
everywhere.  The  city  of  Lansing  has  taken  over  the  Michigan 
Power  Company,  and  because  of  such  action  more  than  $800,000 
in  valuation  dropped  from  the  assessment  rolls  of  the  city. 
When  the  city  of  Detroit  takes  over  or  forces  from  her  streets 
the  Detroit  United  Railway,  approximately  $30,000,000  in  valua- 
tion will  disappear  from  the  tax  rolls  of  that  city.  There  is 
hardly  a  municipality  in  the  state  that  is  not  contemplating 
the  taking  over  or  development  of  some  form  of  public  service 
now  in  private  ownership.  We  are  not  regretting  municipal 
ownership  of  public  utilities.  We  are  simply  pointing  out  the 
inevitable  effect  the  working  out  of  the  principle  is  having  upon 
general  taxation.  The  enactment  of  state  and  national  pro- 
hibition cut  a  big  slice  from  the  base  of  taxation  because  of  the 
disappearance  of  property  that  was  formerly  directly  employed 
in  the  liquor  business,  and  because  of  the  depreciation  in  value 


266  SELECTED   ARTICLES 

of  property  still  in  existence,  such  as  breweries,  warehouses  and 
personal  property.  Here,  again,  we  are  not  arguing  the  ques- 
tion of  prohibition  but  pointing  out  how  it  is  affecting  taxation. 
The  most  pronounced,  the  greatest  numerically  and  most  to 
be  regretted  narrowing  in  the  base  of  taxation  is  that  which 
has  resulted  from  the  failure  of  the  general  tax  law  to  reach 
intangible  property.  Taxation  of  intangible  property  at  a  uniform 
rate  with  other  property  has  always  been  the  weakest  spot  in 
every  general  property  tax  system,  because  the  locating  and 
valuing  of  such  property  is  always  difficult  and  generally  im- 
possible without  the  cooperation  of  the  owner.  That  cooperation 
is  not  always  sought  and  is  given  rarely,  the  owner  justifying 
himself  in  the  concealment  of  such  property  on  the  ground 
that  his  certificates  or  securities  are  but  evidence  of  his  partici- 
pation in  the  ownership  of  tangible  property  already  taxed,  or 
on  the  ground  that  the  uniform  rate  of  taxation,  applied  to 
such  property,  would  confiscate  income,  as  would  often  be  the 
case  with  savings  deposits  and  securities  drawing  a  low  rate 
of  interest;  the  result  being  that  practically  all  such  property 
escapes  taxation  except  such  as  is  in  the  hands  of  the  ignorant 
or  the  helpless. 

Economic  and  Social  Evolution 

Failure  to  locate  and  tax  intangible  property  made  little 
difference  in  the  early  days  of  Michigan  when  the  ad  valorem 
general  property  tax  system  was  established.  At  that  time 
agriculture  was  the  principle  industry.  Property  was  homogen- 
eous, consisting  mainly  of  real  estate  and  tangible  personal 
property  dependent  upon  the  ownership  of  real  estate.  There 
was  'very  little  intangible  property.  Wealth  was  distributed 
comparatively  even,  the  range  of  investments  was  narrow,  earn- 
ings, and  profits  were  generally  converted  into  property  of  the 
same  nature  as  that  which  produced  them.  But  a  wonderful 
change  has  taken  place  in  recent  years  in  the  character  of 
property,  brought  about  largely  through  the  operations  of  what 
may  be  declared  the  greatest  instrument  of  modern  commercial 
life — the  limited  liability  corporation  and  its  accompanying 
secured  debt  feature,  through  v/hich  an  individual  may  invest 
in  any  business  wherever  located  and  hazard  only  his  orginal 
investment,  his  interest  represented  by  intangible  securities  easily 
transferable.  The  resulting  commercial  and  industrial  expansion 


TAXATION  267 

has  been  almost  beyond  comprehension.  Agriculture  has  been 
displaced  as  the  leading  industry.  The  homogeneous  character 
of  property  has  disappeared  and,  instead,  it  is  now  widely 
diversified.  Many  new  forms  of  property  have  been  brought 
into  existence  as  a  result  of  invention,  commercial  and  indus- 
trial development,  and  legal  and  corporate  contrivance.  Income 
has  increased  greatly,  and  is  derived  from  numerous  and  often 
entirely  new  sources.  It  is,  for  the  most  part,  no  longer  re- 
invested in  the  business  which  produced  it,  but  seeks  investment 
in  intangible  and,  wherever  possible,  non-taxable  securities.  To 
appreciate  the  extent  to  which  profits  that  are  fluid  are  passing 
into  intangible,  non-taxable  investments,  one  has  but  to  glance 
over  the  columns  of  any  metropolitan  daily  newspaper  and  notice 
the  offering  of  new  securities.  Today,  a  very  considerable 
portion  of  the  wealth  of  the  state  is  in  intangible  property,  and 
failure,  at  this  time,  to  properly  tax  the  owners  of  such  wealth, 
whether  as  a  result  of  legislation  or  administration,  relieves 
many  from  all  taxation. 

Rise  of  Professional  and  Salaried  Class 

At  the  same  time,  and  largely  as  a  result  of  industrial  and 
commercial  expansion,  a  class  of  citizens  has  been  developed  in 
every  community  whose  income  is  not  derived  from  capital 
represented  by  property,  but  from  salaries,  from  earnings  as 
professional  men,  and  from  particular  kinds  of  business  that 
are  being  daily  brought  into  existence.  This  class  is  generally 
well  educated,  and  requires  more  from  society  and  government 
than  the  average  individual  requires.  But  the  general  property 
tax  fails  to  reach  this  class  of  citizens,  they  contribute  little 
through  taxation,  either  for  the  support  of  government  or  the 
development  of  social  welfare. 

Real  Estate  Bearing  the  Taxation  Burden 

The  accumulative  effect  of  all  these  conditions: — a  constant 
increase  in  the  purposes  for  which  taxation  is  now  levied;  a 
constant  increase  in  the  volume  of  taxation ;  a  constant  nar- 
rowing in  the  base  of  taxation  through  legislation  and  admin- 
istration; changes  in  the  character  of  property,  due  to  com- 
mercial and  industrial  development,  and  in  the  comparative 
wealth  of  individual  citizens;  failure  of  the  general  property 
tax  to  reach  intangible  property  at  a  time  when  such  property 


268  SELECTED   ARTICLES 

is  increasing  faster  than  any  other  form  of  wealth  and  is 
absorbing  the  profits  of  all  kinds  of  business;  the  rise  of  a 
highly  prosperous  class  whose  income  is  not  drawn  from  prop- 
erty but  from  individual  effort  and  from  new  and  strange 
forms  of  business,  has  produced  this  inevitable  result;  that 
practically  all  the  increase  in  the  tax  burden  falls  upon  tangible 
property,  which  is  mainly  real  estate ;  and  heaviest  of  all  upon 
that  form  of  real  estate  which,  because  it  is  visible  and  easily 
valued,  is  always  highest  assessed,  the  farm  and  the  home. 

This  condition — that  under  our  general  property  tax  law 
real  estate  must  inevitably  stand  practically  alone  in  bearing 
the  increased  burden  of  taxation  arising  out  of  new  social  and 
economic  conditions,  has  not  been  appreciated  in  the  past  because 
of  the  universal  undervaluation  of  all  property  assessed  for 
taxation.  But  now  that  the  assessment  of  tangible  property  is 
very  close  to  cash  value  throughout  the  state,  continued  increase 
in  assessment,  sufficient  to  keep  the  rate  of  taxation  from 
mounting,  will  no  longer  be  possible ;  and  the  ad  valorem  gen- 
eral property  tax,  as  the  only  base  of  taxation,  will  be  clearly 
recognized  to  be  unfair  and  unequal,  as  exempting  many  from 
all  taxation,  and  as  falling  with  the  greatest  force  upon  those 
least  able  to  pay. 

Futility   of  Remedies   Proposed 

The  change  in  the  purposes  for  which  taxation  is  now  levied 
and  in  the  character  of  property,  and  the  shifting  of  the  burden 
imposed  by  new  social  and  economic  conditions  upon  real  estate, 
have  not  been  unnoticed,  and  attempts  to  remedy  this  situation 
have  been  made  by  the  Legislature  at  different  times.  But 
because  of  a  desire  to  maintain  as  far  as  possible  the  general 
property  tax  and  because  of  the  constitutional  limitation  im- 
posing a  uniform  rule  of  taxation,  such  attempts  have  been 
limited  to  the  substitution  of  specific  taxation  for  the  general 
property  tax  upon  certain  forms  of  intangible  property;  the 
mortgage  tax  is  an  illustration  of  the  attempts  of  the  Legislature 
to  reach  intangible  property  with  some  form  of  taxation. 

Can  we  further  amend  or  so  administer  the  general  property 
tax  law  as  to  overcome  the  opportunities  for  concealment  and 
enable  us  to  locate  such  property,  and  derive  from  its  taxation 
revenue  in  any  way  proportionate  to  the  amount  of  such  property, 


TAXATION  269 

taxable  in  the  state?  The  experience  of  other  states  that  have 
had  the  same  system  of  taxation  and  the  same  problem  to  solve, 
and  that  have  attempted  to  reach  this  class  of  property  by 
drastic  measures,  has  been  universally  the  same.  They  have 
either  failed  to  locate  any  considerable  amount  of  such  property 
or  it  has  again  disappeared  after  having  been  once  located  and 
taxed.  We  cannot  take  away  from  the  owner  the  state  of  mind 
that  justifies  concealment,  namely, — that  taxation  of  such  prop- 
erty is  unjust  in  theory  and  confiscatory  of  income  in  practice. 
We  cannot  destroy  the  opportunities  that  exist  for  concealment 
of  such  property.  We  cannot  in  all  cases  convince  the  assessing 
officer  that  such  property  exists  and  should  be  taxed,  and  that 
it  is  his  duty  to  find  and  tax  it.  A  Judge  of  the  United  States 
Court  of  Appeals  in  commenting  upon  the  taxation  of  intangible 
property  under  general  property  tax  laws  expressed  himself  as 
follows:  "There  is  a  monotonous  uniformity  in  the  reports  of 
the  failure  of  every  system  attempted.  However  stringent  may 
be  the  legislation,  or  however  arbitrary  and  despotic  may  be  the 
powers  with  which  the  assessors  are  clothed,  the  result  is  that 
always  and  everywhere  no  appreciable  part  of  such  intangible 
property  is  reached  by  laws  however  ingeniously  framed  or 
severely  enforced." 

If  we  continue  attempts  to  apply  the  ad  valorem  general 
property  tax  law,  as  now  framed  and  amended,  to  intangible 
property,  and  should,  through  the  application  of  drastic  methods, 
reach  any  considerable  degree  of  success,  what  permanent  in- 
crease in  revenue  would  result?  In  the  first  place,  the  laws  of 
our  state  exempt  from  taxation  stocks  and  securities  of  Michigan 
corporations  whose  tangible  property  is  taxed  in  the  state ;  there- 
fore the  individual  whose  intangible  property  is  all  of  Michigan 
origin  would  pay  no  direct  tax,  regardless  of  the  amount  of 
his  wealth.  Next,  the  mortgage  tax  law,  now  extended  so  as 
to  include  bonds  of  foreign  governments  and  municipalities, 
and  all  forms  of  secured  debts,  makes  such  property  exempt 
from  taxation  for  all  time  on  the  payment  of  a  single  tax  of  five 
mills.  If  this  law  be  not  repealed,  the  individual  whose  intangible 
property  has  once  paid  the  five  mill  tax  will  thereafter  pay  no 
direct  personal  tax.  If  the  law  be  repealed  and  all  such  prop- 
erty brought  again  under  the  general  property  tax,  all  present 
holdings  of  such  property  that  have  paid  the  five  mill  tax  would 


270  SELECTED   ARTICLES 

still  remain  exempt.  Again,  the  large  and  growing  class  of 
citizens  who  have  little  property,  but  enjoy  large  salaries  or 
large  incomes  as  the  result  of  personal  effort  or  professional 
service,  and  who  receive  more  than  the  average  citizen  from 
government,  would  pay  no  tax.  There  would  remain  only  those 
having  deposits  in  banks,  unsecured  debts,  and  certificates  of 
stock  in  foreign  corporations,  to  be  reached  by  the  general  prop- 
erty tax.  There  are  more  than  $1,000,000,000  on  deposit  in 
Michigan  banks,  but  no  bank  official  can  be  compelled  to  disclose 
the  names  of  his  depositors,  or  the  amount  of  their  balances. 
The  state  of  Connecticut  once  attempted  to  compel  such  dis- 
closure for  the  purposes  of  taxation,  and  had  it  not  been  that 
the  strong  insurance  companies  of  Hartford  had  millions  of 
dollars  available  for  deposit,  every  bank  in  that  state  would 
have  failed  over  night.  As  for  certificates  of  stock  in  foreign 
corporations,  should  we  once  succeed  in  reaching  them,  they 
would  seek  safety  in  concealment  before  the  next  assessment. 
We  can  see  but  little  permanent  relief  to  real  estate  from  the 
most  successful  administration  of  the  ad  valorem  general  prop- 
erty tax  law  applied  to  intangible  property. 

A  solution  of  the  problem  of  taxing  intangible  property  is 
sometimes  attempted  by  classifying  such  property  and  imposing 
different  rates  upon  different  classes — a  low  rate  upon  savings 
bank  deposits,  a  somewhat  higher  rate  upon  bonds  and  mortgages, 
and  still  another  rate  upon  more  profitable  classes  of  intangible 
property,  the  assumption  being  that  by  lightening  the  burden,  the 
owners  of  such  property  will  cease  to  conceal  it  and  it  can  be 
made  to  yield  some  revenue.  The  State  Tax  Commission  in  its 
report  to  the  Governor  in  1914  recommended  changes  in  our 
tax  laws  so  as  to  allow  classification  of  intangible  property. 
The  experience  of  other  states  where  classification  of  property 
is  practiced  shows  that  even  in  such  form  the  law  is  persistently 
evaded.  The  opportunities  for  concealment  still  remain.  The 
belief  of  the  taxpayer,  that  such  form  of  taxation  is  double 
taxation  and  consequently  unjust,  still  remains.  Classification 
of  property  would  require  a  constitutional  amendment,  and  the 
experience  of  other  states  shows  it  to  be  almost  impossible  to 
convince  the  voters  that  intangible  property,  if  directly  taxed, 
should  be  taxed  on  any  other  basis  than  general  property.  The 
farmer  assessed  $5,000  on  his  farm  and  paying  $100  in  taxes  upon 


TAXATION  271 

the  same  would  not  vote  that  the  owner  of  a  $5,000  bond  or 
stock  certificate   should  pay  only  $25   in  taxes. 

How  then  can  we  remedy  taxation  conditions?  How  broaden 
the  base  of  taxation?  How  introduce  universality  and  equality 
of  burden  into  our  taxation  system  and  at  the  same  time  increase 
revenue  to  meet  the  new  social  and  economic  conditions? 

Fundamental  Principles  of  Taxation 

Students  of  tax  legislation  recognize  three  fundamental  prin- 
ciples as  more  or  less  developed  in  the  taxation  systems  of  the 
various  states,  which,  taken  together,  conform  to  all  require- 
ments of  a  model  taxation  system : 

First,  that  tangible  property  of  whatever  character  and  by 
whomsoever  owned  should  be  taxed  by  the  jurisdiction  in  which 
it  is  located  because  of  benefits  and  protection  there  received; 

Second,  that  every  person  having  "taxable  ability" — and  by 
that  we  mean  "who  is  able  to  pay" — should  pay  a  direct  personal 
tax  to  the  government  under  which  he  is  domiciled,  and  from 
which  he  receives  the  direct  personal  benefits  and  protection 
that  government  and  society  confer: 

Third,  that  business  carried  on  for  profit  in  any  locality 
should  be  taxed  in  that  locality  because  of  benefits  and  protec- 
tion there  received. 

Tangible  Property  Taxation 

The  first  proposition — that  tangible  property,  whether  real 
estate,  livestock,  machinery,  merchandise  or  raw  materials, 
should  be  taxed  where  located  regardless  of  ownership  has 
always  been  accepted  by  the  lawmakers  of  Michigan  without 
reservation,  and  is  now  developed,  in  practice  and  legislation, 
by  the  experiences  of  more  than  three-quarters  of  a  century. 
Those  experiences,  we  believe,  make  it  certain  that  this  principle 
should  not  be  modified  as  far  as  real  estate  is  concerned,  except 
as  to  forest  property.  With  respect  to  tangible  personal  prop- 
erty, we  recognize  that  there  may  profitably  be  departures  from 
it  in  certain  cases,  such  as  the  substitution  of  specific  taxation 
for  the  general  property  tax  with  respect  to  motor-vehicle 
property.  We  also  recognize  that  where  the  second  and  third 
propositions  above  outlined  are  fully  developed,  certain  kinds 
of  tangible  personal  property,  such  as  tools,  implements,  live- 


272  SELECTED   ARTICLES 

stock,  may  properly  be  exempted  in  whole  or  in  part  from  the 
operation  of  this  first  principle,  but  the  principle  itself  should 
stand  practically  without  amendment. 

Direct  Personal  Taxation 

The  second  proposition — that  every  person  having  "taxable 
ability,"  that  is,  "able  to  pay,"  should  pay  a  direct  personal  tax 
where  he  is  domiciled — while  equally  as  just  and  logical  as  the 
first  proposition,  and  as  widely  recognized,  has  been  practiced 
far  less  successfully.  It  has  been  attempted  through  poll  taxes, 
rental  taxes,  taxes  upon  professions  and  occupations;  but  the 
more  general  practice  has  been  to  attempt  it  by  making  "intang- 
ible property  owned"  the  measure  of  the  individual's  "taxable 
ability,"  and  assessing  him  for  such  securities  and  credits  as  he 
might  declare,  or  the  assessor  locate.  Michigan  has  adopted 
this  method  and  includes  all  kinds  of  intangible  property  under 
the  general  property  tax,  applying  the  uniform  rate,  and  has  only 
in  recent  years  modified  it  by  the  adoption  of  the  so-called 
"Mortgage  Tax  Law."  She  has  recognized  the  principle  of 
direct  personal  taxation,  but  has  destroyed  its  vitality  by  her 
method  of  enforcing  it. 

Net  Income  the  Unfailing  Index  of  Taxable  Ability 

The  most  universal,  the  most  complete  and  the  most  accurate 
measure  of  the  ability  of  the  individual  to  pay  personal  taxes  is 
"net  income."  "Personal  property  owned,"  correctly  determined 
and  expressed  in  dollars,  will  measure  the  taxable  ability  that 
comes  from  the  ownership  of  certain  kinds  of  wealth,  such  as 
securities  and  credits.  "Net  income"  will  measure  such  wealth 
equally  as  well,  and  will  measure  "taxable  ability"  resulting  from 
the  earnings  of  the  salaried  man,  the  professional  man,  the  busi- 
ness man,  the  laborer;  it  measures  "taxable  ability"  resulting 
from  rents  and  royalties,  and  introduced  into  a  system  of  taxa- 
tion, it  materially  broadens  the  base  of  taxation. 

Adam  Smith,  years  ago,  laid  down  this  proposition:  "Sub- 
jects of  every  state  ought  to  contribute  to  the  support  of  the 
government  as  nearly  as  possible  in  proportion  to  their  respec- 
tive abilities;  that  is, — in  proportion  to  the  revenue  which  they 
respectively  enjoy  under  the  protection  of  the  state."  Other 
students  of  taxation,  holding  that  taxes  are  the  part  of  the  citi- 


TAXATION  273 

zen's  property  or  earnings  he  contributes  for  public  use  in  order 
to  insure  protection  for  the  rest  of  his  property  or  income,  have 
supported  Adam  Smith's  proposition  that  taxation  should  be  pro- 
portional ;  declaring  that  as  protection  or  benefit  received  is  pro- 
portional to  the  amount  of  property  protected  or  income  enjoyed, 
it  necessarily  follows  that  taxation,  to  be  equitable,  must  be 
directly  proportional  to  property  or  income.  Most  modern  writ- 
ers, while  not  objecting  to  proportional  taxation  of  tangible 
property,  hold  that  direct  personal  taxation,  through  an  income 
tax,  should  not  be  proportional,  but  progressive.  Even  Adam 
Smith  modified  his  famous  principle  by  declaring:  "It  is  not 
unreasonable  that  the  rich  should  contribute  to  public  expense 
not  only  in  proportion  to  their  revenues  but  something  more 
than  proportion."  Practically  all  agree  that  it  is  not  wise  to 
exact  a  personal  tax  for  support  of  government  from  any  class, 
if  by  so  doing  the  standard  of  living  of  that  class  is  necessarily 
reduced  below  a  proper  level,  and  therefore  exemption  from  any 
personal  tax  is  recognized  as  proper  for  those  whose  net  income 
does  not  exceed  the  sum  recognized  as  the  minimum  necessary 
for  proper  subsistence.  This  exemption  is  a  departure  from 
proportional  taxation.  Protection  or  benefit  resulting  from  tax- 
ation is  not  the  only  thing  that  should  be  considered, — there  is 
also  the  sacrifice  involved  in  paying  the  tax,  in  giving  up  for 
public  use  something  that  would  otherwise  be  made  use  of  to 
satisfy  personal  wants.  It  is  the  right  of  every  individual  to 
make  use  of  all  his  income  in  satisfying  his  wants,  and  any 
restriction  of  the  power  to  do  so  necessarily  involves  sacrifice 
on  his  part.  Personal  taxation  in  the  form  of  taxation  of  income, 
therefore,  involves  sacrifice  of  some  of  our  wants.  But  our 
wants  are  not  all  equally  pressing  and  the  sacrifice  required  in 
giving  up  comforts  that  border  on  actual  necessities  of  life  is 
much  greater  than  is  the  sacrifice  that  does  not  involve  giving 
up  any  comforts  and  only  the  more  extreme  luxuries  of  life. 
Proportional  taxation,  the  requiring  everyone  to  pay  the  same 
rate  of  income  taxation,  gives  no  consideration  to  the  inequal- 
ities of  sacrifice  required  as  between  incomes  of  different  amounts. 
True  equality  in  income  taxation  should  consider  the  sacrifice 
involved  as  well  as  the  benefit  received  and  not  require  that 
the  same  rate  of  taxation  should  be  paid  by  all,  but  that  rates 
should  be  so  arranged  as  to  require,  as  near  as  possible,  the 


274  SELECTED   ARTICLES 

same  degree  of  sacrifice  from  all.  Actual  and  complete  equality 
of  sacrifice  is  of  course  impossible  of  attainment.  But  by  im- 
posing a  low  rate  upon  small  incomes  and  increasing  the  rate 
as  the  income  increases,  by  making  the  income  tax  graduated 
or  progressive,  whichever  you  choose  to  call  it,  we  can  secure 
relative  equality  of  sacrifice. 

A  personal  income  tax,  with  exemptions  sufficient  to  enable 
the  individual  to  maintain  a  proper  standard  of  living,  and  with 
rates  of  tax  graduated  so  as  to  equalize  as  far  as  possible  the 
sacrifice  imposed,  is  the  fairest,  the  most  equitable,  and  the  least 
oppressive  system  of  taxation  as  yet  devised,  and  the  only  sys- 
tem that  will  reach  those  whose  wealth  is  in  intangible  property, 
and  those  whose  income  is  derived  from  personal  effort. 

Justice  and  Equity  of  Income  Taxation 

The  justice  and  equity  of  the  graduated  income  tax  is  shown 
by  the  fact  that  it  conforms  at  all  times  and  for  all  classes  to 
the  principle  of  "ability  to  pay."  It  not  only  relieves  those  with 
little  property  from  heavy  burdens,  but  also,  in  the  case  of  those 
with  large  wealth,  it  responds  to  the  variations  in  individual  con- 
ditions that  occur  with  all  citizens  from  year  to  year.  An  in- 
dividual may  be  highly  prosperous  one  year  and  have  little  in- 
come the  next  year  without  any  apparent  change  in  the  amount 
of  property  owned.  The  general  property  tax  is  merciless  in  its 
exactions  and  is  regardless  of  conditions,  but  the  graduated  in- 
come tax  responds  to  such  conditions.  The  progressive  income 
tax  never  confiscates  property,  but  the  general  property  tax  con- 
fiscates hundreds  of  thousands  of  dollars  worth  of  property 
every  year. 

Great  Scope  of  the  Income  Tax 

The  justice  and  equity  of  the  progressive  income  tax  is 
further  shown  by  the  fact  that  it  reaches  officials,  professional 
men,  and  certain  classes  of  business  men  who  escape  entirely  the 
general  property  tax.  Of  such  it  is  the  truth  to  say  that  their 
gains  are  comparatively  large.  They  live  in  style  and  comfort. 
They  enjoy  the  protection  and  benefits  of  government  and 
society  without  contributing  directly  to  its  support.  They  are 
also,  as  a  class,  well  educated  and  well  informed,  but  by  reason 
of  being  untouched  by  taxation  they  have  little  concern  as  to 


TAXATION  275 

public  business,  and  are  apt  to  become  indifferent  to  their 
duties  as  citizens.  The  bringing  of  this  class  into  the  group  of 
taxpayers  is  a  distinct  public  gain  from  more  standpoints  than 
that  of  revenue. 

Practically  all  political  economists  recognize  the  justice  and 
equity  of  income  taxation  as  a  theoretical  proposition.  Those 
who  oppose  it  generally  do  so  on  the  ground  that  it  fails  in 
practical  operation,  and  cannot  be  administered  on  the  high  plane 
claimed  for  it ;  that  it  is  inquisitorial  in  character,  and  hence 
not  suited  for  democratic  governments;  that  it  is  socialistic; 
that  it  is  a  tax  on  brains,  energy  and  industry;  that  it  invites 
perjury  and  evasion;  that,  in  the  past,  it  has  failed  as  part  of  a 
state  taxation  system  and  responded  neither  to  the  demands  of 
justice  nor  the  needs  of  revenue. 

Previous  to  1903,  sixteen  of  the  states  of  the  Union  had 
attempted  income  taxation  in  some  form,  but  on  that  date  only 
six  of  the  states  were  continuing  such  attempts.  The  failure 
of  these  early  attempts  was  due,  in  part,  to  defects  in  the  laws 
themselves,  which  were  generally  special  taxes  upon  income  from 
particular  sources  and  rarely  a  general  tax  upon  net  income ; 
but,  chiefly,  the  failure  was  due  to  the  utter  inefficiency  of 
their  administration.  In  respect  to  both  legislation  and  admin- 
istration, these  early  attempts  at  state  income  taxation  are  no 
more  to  be  compared  to  the  modern  state  income  tax  systems, 
such  as  are  now  administered  in  Wisconsin,  New  York,  Massa- 
chusetts, Missouri,  Oklahoma,  and  other  states,  than  the  old 
street  cars  drawn  by  horses  or  mules  are  to  be  compared  to 
the  modern  municipal  transportation  system. 

Income  Taxation  the  Great  Barrier  to  Socialism 

The  argument  that  the  income  tax  is  inquisitorial  and  un- 
democratic is  absurd  and  unconvincing.  What  tax  system 
efficiently  administered  is  not  inquisitorial?  The  general  property 
tax  is  inquisitorial,  especially  when  applied  to  personal  property. 
Under  it  the  assessing  officer  is  authorized  to  demand  from 
the  taxpayer  a  full  statement  of  all  his  property,  money,  credits, 
debts,  securities,  even  the  jewels  and  adornments  of  his  family. 
The  tariff  tax  is  inquisitorial.  You  must  declare  every  article 
you  bring  into  the  country  and  its  cost,  and  this  does  not  give 
immunity  from  personal  examination  of  your  possessions.  The 


276  SELECTED   ARTICLES 

internal  revenue  tax  in  its  entire  administration  is  inquisitorial 
If  tax  laws  are  not  inquisitorial  and  not  administered  in  that 
way,  they  are  evaded  more  or  less,  and  honest  men  suffer  and 
dishonest  men  gain.  If  we  do  not  repeal  the  general  property 
tax  as  far  as  it  applies  to  intangible  property,  and  if  we  are  to 
have  any  degree  of  success  in  enforcing  that  tax,  we  must  ad- 
minister it  in  the  most  inquisitorial  manner.  The  fact  that  tax 
laws  not  administered  in  an  inquisitorial  manner  are  continually 
evaded  is  not  due  to  the  particular  character  of  the  tax,  but  to 
the  nature  of  taxation  itself  which  is  "sacrifice  without  glory' 
or  even  without  recognition  of  the  sacrifice,  and  human  nature 
has  not  yet  reached  the  point  where  it  does  not  try  to  evade 
such  form  of  sacrifice.  To  condemn  the  graduated  income  tax 
because  it  endeavors  to  prevent  evasion,  compels  us  to  condemn 
efficient  administration  of  all  tax  laws.  John  Sherman,  former 
Senator  from  Ohio  and  Secretary  of  the  Treasury,  speaking  on 
this  question,  said :  "The  income  tax  is  the  least  inquisitorial  and 
injurious  of  all  taxes  imposed  by  government  and  is  the  one 
tax  that  falls  upon  office  and  upon  brains." 

The  further  claim  is  made  that  the  income  tax  cannot  be 
efficiently  administered  without  causing  capital  to  seek  immunity 
by  withdrawing  from  the  states  enforcing  such  a  tax.  The 
refutation  of  this  claim  is  found  in  the  attitude  of  the  states 
administering  a  present  day  personal  income  tax,  such  states 
as  New  York,  Massachusetts,  Wisconsin,  Missouri  and  Oklahoma 
Not  one  of  them,  after  experience  with  this  form  of  taxation, 
has  any  thought  of  repealing  its  income  tax  law  or  of  changing 
it  other  than  to  make  it  more  inclusive.  New  York  and  Massa- 
chusetts are  especially  the  home  of  capital,  and  would  be  ma- 
terially injured  if  capital  actively  resented  the  imposition  of  a 
state  income  tax.  This  argument  is  further  refuted  by  the 
reports  of  the  commissioners  or  officials  'charged  with  admin- 
istering income  taxation.  In  Wisconsin,  for  instance,  the  amount 
of  the  income  tax  levied  increased  from  $4,145,676  in  1914  to 
$11,784,151  in  1917,  a  condition  which  would  not  exist  if  wealth 
were  not  increasing  at  a  tremendous  rate  within  the  state, 
instead  of  being  driven  from  the  state.  This  contention  is 
also  refuted  by  the  fact  that  half  a  dozen  state  Commissions, 
after  studying  the  operation  and  effect  of  state  income  taxation 
in  recent  years,  have  reported,  or  are  preparing  to  report,  at 


TAXATION  277 

an  early  date,  to  their  respective  Legislatures  favoring  an 
income  tax  system  for  their  respective  states.  As  an  instru- 
ment for  driving  capital  from  a  state,  the  income  tax  is  not 
to  be  mentioned  in  the  same  breath  with  the  ad  valorem  general 
property  tax  upon  intangible  property  efficiently  administered. 
The  argument  that  the  income  tax  is  inquisitorial  and  cannot 
be  successfully  administered  is  often  supplemented  by  the  charge 
that  it  is  "socialistic"  in  character.  Why  it  is  any  more*  socialistic 
to  tax  a  man  on  his  net  income  than  it  is  to  tax  the  particular 
property  producing  the  income  is  difficult  to  see.  Graduated 
income  taxation  might  be  called  "socialistic"  if  its  avowed  pur- 
pose or  actual  result  was  to  aid  in  bringing  about  such  economic 
results  as  the  more  even  distribution  of  wealth  or  the  confiscation 
of  private  property ;  but  such  is  not  the  purpose  or  the  result. 
The  equalizing  of  sacrifice  imposed  by  taxation  is  as  necessary 
to  exact  justice  as  is  the  granting  of  equal  rights  and  equal 
opportunities.  Many  who  would  scorn  to  be  classed  as  "social- 
istic" contend  that  taxation  may  properly  fill  an  economic  or 
social  role  as  well  as  a  strictly  revenue  role.  Protective  tariff 
laws  are  not  framed  for  revenue  alone,  but  for  the  added  and 
openly  avowed  purpose  of  aiding  industrial  development  and 
individual  prosperity.  Sumptuary  laws  often  have  the  avowed 
purpose  of  checking  consumption  as  well  as  the  production  of 
revenue.  Other  taxes  are  equally  open  to  the  charge  of  being 
socialistic.  The  general  property  tax,  in  that  it  affects  only 
property  owners  and  is  always  loaded  down  with  exemptions,  is 
socialistic.  Inheritance  taxes  are  still  more  open  to  the  charge 
of  being  socialistic.  The  cry  "socialistic"  has  many  times  been 
used  to  impede  social  reforms  that  have  been  successfully 
inaugurated  in  spite  of  such  opposition.  This  cry  was  used 
against  child  labor  legislation,  against  mothers'  pensions,  just 
as  it  is  now  used  against  progressive  income  taxation.  If  we 
continue  to  run  from  social  reforms,  and  decline  to  undertake 
economic  reforms  at  the  cry  "socialistic,"  we  will  assist  the 
Socialist  Party  in  its  campaign  for  true  socialistic  doctrines, 
with  which  we  have  no  sympathy. 

Comparison  of  Federal  and  State  Income  Taxation 

Objection  to  the  personal  income  tax  will  come  from  those 
who    do   not   understand   the   difference   between    the   proposed 


278  SELECTED   ARTICLES 

state  income  tax  and  the  existing  Federal  income  tax.  The 
Federal  income  tax  is  new  taxation  designed  to  collect  a  very 
large  revenue,  made  necessary  by  war-time  expenditures  of  the 
government.  It  does  not  displace  any  existing  taxation.  It  is 
not  designed  to  equalize  taxation.  It  is  a  revenue  measure, 
solely,  and,  for  that  reason,  is  loaded  down  with  high  rates  of 
taxation,  excess  profits  taxes  and  many  features  of  administra- 
tion that  are  exacting  in  character  and  annoying  to  the  tax- 
payer. The  proposed  state  income  tax,  on  the  other  hand,  is 
intended  as  a  substitute  for  that  part  of  our  present  taxation 
system  which  fails  in  operation.  Its  purpose  is  equalisation 
of  taxation  rather  than  increased  taxation.  Millions  of  in- 
creased revenue  must  be  raised  in  any  event  and  to  raise  it 
through  income  taxation  will  not  increase  the  burden  of  those 
now  contributing  their  proper  quota;  it  will  come  from  those 
now  escaping  taxation.  The  state  personal  income  tax  should 
be  simple,  easy  to  administer,  with  no  excess  profits  taxes  and 
the  highest  rate  not  exceeding  8  per  cent. 

Immediate  Action  Necessary 

There  is  a  disposition  on  the  part  of  taxpayers  to  endure  con- 
ditions with  which  they  are  familiar  rather  than  to  substitute  for 
them  other  conditions  with  which  they  have  had  no  experience. 
There  is  the  feeling  on  the  part  of  many  people  that  the  coun- 
try is  now  going  through  a  period  of  readjustment,  in  the  course 
of  which  the  program  of  Federal  taxation  may  be  radically 
changed.  There  are  some  who  suggest  alternative  propositions 
for  the  state  income  tax,  such  as  a  refund  by  the  Federal  Gov- 
ernment to  all  the  states  of  a  fixed  per  cent  of  the  income  tax 
collected  in  each  state;  or  the  levy  of  a  surtax  upon  the  Fed- 
eral income  tax  by  such  states  as  desire  state  income  taxation. 
Both  alternative  propositions  could  limit  the  actual  administra- 
tion of  all  income  tax  legislation  to  officials  of  the  United  States 
Government.  The  proposition  of  a  refund  to  the  states  by  the 
Federal  Government  would  also  result  in  uniform  tax  rates  and 
uniform  methods  of  administration  throughout  the  United 
States.  All  holding  such  views  argue  that  we  should  delay  en- 
tering upon  the  solution  of  our  taxation  problems.  With  this 


TAXATION  279 

sentiment  we  have  no  sympathy.  Income  taxation,  for  state 
and  nation,  has  come  to  stay.  The  operations  of  the  Federal 
income  tax  have  made  the  people  familiar  with  the  principle  of 
income  taxation,  and  the  question  of  introducing  this  principle 
into  our  taxation  system  should  in  no  way  depend  upon  the 
rates  of  the  Federal  income  tax  or  the  amendment  of  its  excess 
profits  tax  features.  Thirteen  states  have  adopted  some  form 
of  income  taxation.  We  have  the  legislation  and  practical  ex- 
perience of  these  states  to  guide  us.  Other  states  have  studied 
the  question  and  the  results  of  their  investigations  are  available 
for  our  information.  The  taxation  problem  of  Michigan  is 
now  acute  in  every  political  subdivision  of  the  state.  Action 
to  replace  the  present  unenforcible  law  for  the  taxation  of  in- 
tangible property,  with  a  law  that  will  reach  such  property  is 
imperatively  demanded  at  the  earliest  possible  date. 


ADVANTAGES  OF  THE  INCOME  TAX1 

The  income  tax  reaches  everyone  in  accordance  with  his 
ability  to  pay.  It  is  the  one  tax  that  will  most  fairly  and 
equitably  reach  the  professional  and  salaried  men  who  earn 
large  incomes.  They  now  entirely  escape  taxation  except  on 
such  property  as  they  may  have  accumulated  and  which  very 
obviously  is  no  fair  indication  of  their  ability  to  contribute  to 
the  support  of  government. 

This  is  likewise  true  in  respect  to  the  great  wealth,  represented 
by  the  securities  and  credits  of  all  kinds  and  by  various  forms 
of  intangible  property,  which  is  now  escaping  taxation.  One  of 
the  most  interesting  facts  to  be  gained  from  a  study  of  the  Wis- 
consin results  is,  that  the  classes  of  occupations,  of  professions 
and  of  property-owners  that  most  successfully  escape  in  New 
York,  are  the  very  ones  that  pay  the  larger  part  of  the  Wiscon- 
sin tax  levied  upon  firms  and  individuals.  In  New  York  State 
the  following  classes  are  able  to  escape  taxation  in  a  large 
degree:  Bankers  and  capitalists,  brokers,  lawyers,  merchants  and 
jobbers,  manufacturers,  physicians  and  surgeons,  and  other  pro- 
fessions. 

1  Report  of  the  Joint  Legislation  Committee  on  Taxation  of  the  State 
of  New  York.  1916.  p.  195-206. 


280 


SELECTED   ARTICLES 


We  quote  in  this  connection  from  the  Report  of  1914,  which 
reads  as  follows: 


la 
li 

„  s 
ss 

Occupation 

Bankers   and   capitalists 

Estates,    guardianships,    etc 

Lumbermen    

Manufacturers     

Lawyers    

Miners     

Retired 

Merchants  and  jobbers   , 

Physicians   and  surgeons    

Brokers,    real   estate   men,    etc.. 

Public    officials    

Mechanics    and    tradesmen    

Professions — miscellaneous     .... 

Professors  and  teachers    

State   and   public   employees.... 

Public  service   employees 

Farmers     

Bookkeepers,  stenographers,  etc. 

Laborers   : . 

Other  occupations 

Unknown    

All    occupations    

Certain  important  conclusions  may,  however,  be  drawn  with 
safety.  For  instance,  the  census  statistics  make  it  plain  that 
there  are  not  less  than  one  hundred  sixty-five  thousand 
farmers  in  the  state,  from  which  it  follows  that  certainly  less 
than  5  per  cent  of  the  farmers  of  the  state  are  subject  to  the  in- 
come tax.  Similarly,  it  is  certain  that  considerably  less  than  i 
per  cent,  and  probably  less  than  */2  of  i  per  cent,  of  the  laborers 
of  the  state  are  assessed  for  income  taxes.  Of  the  bookkeepers, 
stenographers  and  clerks,  the  statistics  indicate  that  something 
less  than  6  per  cent  were  assessed  for  income  tax  in  1914. 

On  the  other  hand,  it  is  practically  certain  that  more  than  50 
per  cent  of  the  bankers  and  capitalists,  lawyers  and  physicians 
and  surgeons  were  subject  to  the  individual  income  tax,  to  say 
nothing  of  the  amounts  which  these  persons  pay  indirectly 
through  the  tax  on  corporations.  It  is  interesting  also  to  note 
that  probably  not  less  than  20  per  cent  of  the  public  officials, 
public  employees  and  public  laborers  of  the  state  were  assessed 


£  *" 

I 

r 

11 

8« 

982 

$116.33 

8.00 

1.61 

4.76 

977 

82.42 

5.98 

i.  60 

3.76 

346 

81.27 

1.97 

•  57 

1.32 

2,920 

78.26 

16.01 

4.80 

11.36 

1,202 

59.26 

5.02 

1.97 

4.18 

80 

38.89 

O.22 

.18 

3,263 

37-24 

8.5I 

5.36 

6-93 

11.838 

24.13 

2O.01 

19-45 

23-55 

1,642 

22.78 

2.62 

2.70 

3-30 

5,338 

20.86 

7.80 

8-77 

8.72 

555 

16.05 

0.62 

.91 

•93 

5,768 

12.63 

5-10 

9.48 

6.17 

2,359 

12.30 

2.03 

3-88 

2.96 

2,372 

10.40 

3-90 

2.08 

1,203 

8.15 

0.69 

1.98 

•99 

2,870 

7.96 

1.  60 

4.72 

2.07 

7,225 

7.66 

3.87 

11.87 

6.40 

4,148 

4.96 

1.44 

6.82 

2-54 

882 

2.91 

0.18 

1-45 

•34 

4,336 

20.25 

6.15 

7.12 

6.78 

554 

11.71 

0-45 

.91 

.68 

60,860 

23.46 

IOO.OO 

IOO.OO 

IOO.OO 

TAXATION  281 

for  income  tax.  The  federal  census  for  1910  shows  7,338  em- 
ployees in  the  public  service,  not  elsewhere  classified,  including 
guards,  watchmen,  doorkeepers,  firemen  and  laborers.  Table  IV 
shows  that  1,758  public  officials  and  employees  were  assessed  for 
income  tax  in  1914,  or  somewhere  between  one-quarter  and  one- 
fifth  of  the  number  recorded  in  the  census.  There  cannot  be  a 
very  large  number  of  public  employees  classified  elsewhere  than 
in  this  group. 

Perhaps  as  good  a  measure  of  the  relative  burden  of  the 
tax  as  could  be  secured  is  found  in  the  figures  showing  the 
average  tax  per  taxpayer.  The  various  occupations  are  arranged 
in  the  order  of  the  size  of  this  average  tax  in  Table  VI.  The 
highest  per  capita  tax,  $116.33,  is  paid  by  bankers  and  capitalists; 
the  lowest  by  laborers,  $2.91.  The  tax  was  evidently  highest 
upon  investors  and  allied  classes,  those  drawing  their  incomes 
largely  in  the  form  of  interest.  Next  it  touches  the  extractive 
and  manufacturing  industries — lumbering,  manufacturing  and 
mining — though  it  should  be  remembered  that  in  these  classes  a 
relatively  large  proportion  of  the  tax  is  offset  by  the  personal 
property  tax.  Merchants  and  jobbers  follow  closely,  among 
whom  also  a  large  part  of  the  tax  is  offset  by  personal  property 
taxes,  and  thereafter  come  the  professional  classes.  The  lawyers 
it  will  be  observed  are  above  the  other  professional  classes, 
standing  between  manufacturers  and  miners.  The  tax  on  the 
professional  classes  generally  is  additional  or  supplementary.  It 
is  not  offset  by  the  personal  property  taxes  and  no  equivalent 
tax  was  collected  from  these  classes  before  the  income  tax  was 
introduced.  The  statistics  indicate  that  the  income  tax  is  per- 
forming exactly  the  service  for  which  it  was  introduced — draw- 
ing a  larger  contribution  from  the  investing  and  professional 
classes  and  from  those  elements  of  the  manufacturing  and  com- 
mercial classes  which  are  usually  prosperous  and  subject  to 
higher  income  than  personal  property  taxes. 

This  conclusion  is  further  emphasized  when  we  remember 
that  the  largest  accumulations  of  so-called  intangible  personal 
property  are  found  in  our  great  cities,  and  that  the  income  tax 
is,  strictly  speaking,  an  urban  tax.  In  Wisconsin,  the  first  year, 
over  40  per  cent  of  the  entire  tax  was  charged  in  Milwaukee 
County  and  more  than  80  per  cent  in  the  seventeen  counties 
having  the  larger  cities  of  the  state,  while  20  per  cent  was 


282  SELECTED  ARTICLES 

charged   in   the   remaining  fifty-four  counties   containing  about 
50  per  cent  of  the  population. 

The  urban  character  of  the  tax  is  shown  in  another  way 
by  the  returns  from  Dane  county  in  which  the  capital  is  located. 
In  the  county  there  are  six  times  as  many  farmers  as  there  are 
public  employees,  "yet  only  sixty-eight  farmers  in  Dane  County 
as  contrasted  with  six  hundred  twenty-four  public  employees  and 
professors  will  pay  an  income  tax;  and  the  farmers  will  pay  an 
income  tax  of  $877.35,  while  the  public  officials,  professors  and 
teachers  will  pay  $7,224.44,  more  than  eight  times  as  much." 

The  income  tax  is  primarily  an  urban  tax.  Milwaukee  county,  for 
instance,  contains  only  8.56  per  cent  of  the  population  of  the  state,  but 
42.55  per  cent  of  the  total  income  and  47.12  per  cent  of  the  total  income 
tax  are  assessed  in  that  county.  The  fifty-four  rural  counties,  on  the  other 
hand,  contain  nearly  50  per  cent  of  the  population  but  pay  less  than  one- 
fifth  of  the  tax. 

The  marked  urban  character  of  the  tax  conies  out  in  other  relationships. 
For  instance,  the  total  income  tax  assessed  in  1914  amounts  to  $1.77  per 
capita.  But  the  per  capita  tax  in  Milwaukee  City  is  $4.50,  and  in  the 
rural  counties  only  53C.  Again,  the  average  rate  of  taxation  paid  is  3.61 
per  cent  in  Milwaukee  County,  but  only  1.95  per  cent  in  the  rural  counties 
of  the  state.  Finally,  in  Milwaukee  County  4.69  per  cent  of  the  popula- 
tion is  subject  to  the  tax  on  firms  and  individuals,  while  in  the  rural 
districts  only  1.71  per  cent  of  the  population  was  assessed.  In  short,  a 
smaller  proportion  of  the  people  pay,  and  they  pay  lower  average  rates 
on  smaller  average  incomes,  in  the  country  than  in  the  city. 

As  has  already  been  shown,  the  property  tax  falls  with  the 
greatest  weight  on  the  man  of  small  means,  on  the  widow,  on 
trust  estates,  on  young  and  struggling  business  concerns,  and, 
generally  speaking,  on  those  least  able  to  bear  it  Under  the 
income  tax  these  people  contribute  their  proportion,  but  their 
proportion  is  relatively  small  as  compared  with  that  of  the 
wealthy  and  prosperous,  who  enjoy  large  incomes  and  are,  there- 
fore, better,  and  with  much  less  sacrifice,  able  to  shoulder  the 
tax  burden,  and  yet  who,  today,  are  practically  free  from  taxation, 
except  in  so  far  as  they  own  real  estate. 

We  cite  again  the  Wisconsin  results  for  the  purpose  of 
illustrations : 

This  table  contains  some  very  significant  data.  Of  those  assessed  in 
1914  for  income  tax,  41,732  had  taxable  incomes  under  $1,000.  This 
group  of  small  taxpayers  constituted  68  per  cent  of  the  total  number,  but 
paid  less  than  n  per  cent  of  the  total  tax.  The  average  tax  in  this  group 
is  $3.74. 

On  the  other  hand,  315  taxpayers  having  incomes  of  $15,000  or  more, 
and  constituting  about  %  of  i  per  cent  of  the  total  number  of  taxpayers, 
were  assessed  for  practically  40  per  cent  of  the  aggregate  tax,  and  the 
average  tax  on  each  person  in  this  group  is  $i,794-  This  group  of  three 
hundred  fifteen  taxpayers  constitutes  less  than  2/100  of  i  per  cent 
of  the  population  of  the  state.  The  two  upper  groups  of  taxpayers — 
six  hundred  sixty-seven  in  number — constitute  less  than  3/100  of  i  per 
cent  of  the  entire  population  but  contributes  nearly  one-half  of  the  in- 
come tax. 


TAXATION 


283 


Classified     by 

j! 

1*93 

If 

lisas 

lo§3 

Hi 

amount   groups 
of  income 

a  $ 
a  & 
K  * 

2«|s 

So  -2 

x  S 

pa 

u  s§s 

£S*S 

!•! 

Total 

Under  1,000.... 
1,000  to    1,999 
2,000  to    2,999 

41,732 
10,528 
3,855 

63.57 
17.30 
6.33 

15,545,782.60 
11,004,276.71 
9,210,837.07 

21.02 
18.93 
12.45 

156,202.53 
152,871.09 
110,348.59 

10.94 
10.71 
7.73 

3.74 
14.52 
28.62 

3,000  to    3,999 

1,691 

2.78 

5,760,689.61 

7.79 

75,436.33 

5.28 

44.61 

4,000  to    4,999 

908 

1.49 

4,027,847.43 

5.44 

57,906.82 

4.05 

63.76 

5,000  to    9,999 

1,479 

243 

9,820,371.30 

13.28 

182,901.61 

12.81 

123.70 

10,000  to  14,999 
15,000  and  over. 

352 
315 

0.58 
0.52 

4,245,486.58 
11,354,613.95 

5.74 
15.35 

127.168.00 
565,087.56 

8.91 
39.57 

361.26 
1,794.00 

As  a  further  illustration  we  may  give  an  example  of  the 
amount  that  would  be  contributed  by  the  highest  and  the  lowest 
classes  of  tax-payers  under  the  terms  of  the  bill  attached  to 
this  report.  72,345  people  having  incomes  less  than  $3,000  would 
pay  a  total  of  $287,587.15,  while  eighty-two  people  having  the 
larger  incomes  in  the  state  would  pay  a  total  of  $1,809,649.  The 
result  is  almost  startling,  and  yet  the  eighty-two  would  be  paying 
only  their  share.  But  neither  for  the  wealthy  man  nor  for  the 
poor  man  would  the  burden  be  a  heavy  one,  for  a  low  rate 
running  from  ^  of  i  per  cent  to  a  maximum  of  2.  per  cent  on 
individuals  would  satisfy  all  our  needs.  Under  this  rate,  with 
an  exemption  of  $1,500  to  a  single  man  and  of  $2,000  to  the 
average  family,  the  family  man  with  an  income  of  $3,000  would 
pay  but  $5  per  annum,  while  the  man  with  an  income  of  $100,000 
would  pay  somewhat  less  than  $2,000  per  annum.  Could  either 
one  of  them  fairly  complain?  Nor,  under  such  circumstances, 
would  there  be  any  real  incentive  to  escape. 

No  man  will  willingly  pay  a  2.  per  cent  tax  on  capital  value, 
which  amounts  to  taking  from  30  to  50  per  cent  of  his  income. 
Experience  has  shown,  however,  that  he  will  pay  so  reasonable 
an  amount  as  2.  per  cent  on  income,  particularly  "when  he  knows 
that  all  who  should  are  contributing  their  share.  Under  our 
present  system  the  conscientious  tax-payer  is  not  only  asked  to 
pay  a  confiscatory  rate,  but  he  is  asked  to  do  so  with  the  full 
knowledge  that  merely  everyone  in  the  community  is  dodging 
the  tax  in  one  way  or  another.  Most  men  are  honest.  Most 
men,  we  believe,  are  willing  to  pay  a  fair  and  reasonable  tax, 
but  there  is  a  point  in  taxation  where  it  is  dangerous  to  test 
human  nature  too  far,  and  where  the  honesty  of  the  average 


284  SELECTED   ARTICLES 

citizen  is  forced  to  give  way  to  the  instinct  of  self-protection. 
Turning  now  to  general  business  corporations  and  individ- 
uals and  partnerships  engaged  in  business,  we  find  that  in  so  far 
as  these  classes  are  concerned,  the  personal  property  tax  is 
illogical,  burdensome,  unequal  and  therefore  inequitable;  that 
the  great  majority  of  business  houses  escape  taxation,  but  that 
those  that  do  pay  are  taxed  at  a  rate  altogether  too  high,  a  fact 
which  puts  them  at  an  unfair  disadvantage  as  compared  with 
their  competitors;  that,  in  brief,  the  personal  property  tax  is,  in 
the  main,  a  failure,  and  to  the  extent  that  it  does  succeed,  grossly 
unjust.  We  find,  moreover,  that  the  assessment  and  valuation 
of  property  gives  rise  to  all  manner  of  difficulties,  particularly 
in  the  case  of  corporations  where  it  is  necessary  to  include  the 
franchise  value  as  part  of  the  gross  assets  or  of  the  capital  stock 
value;  and  that  ultimately  the  assessors  find  that  the  fairest 
way  to  reach  the  capital  value  of  the  property  is  through  the 
capitalization  of  net  earnings.  Few,  if  any,  of  the  difficulties 
arise  when  individuals  engaged  in  business  and  general  business 
corporations  are  taxed  on  a  net-earning  basis.  As  has  been  well 
said  by  Dr.  Ely  in  the  report  of  the  Maryland  Tax  Commission  : 

Furthermore,  it  is  of  moment  that  the  income  tax  does  not  make  it 
more  difficult  for  a  poor  man  to  begin  business  or  to  continue  business. 
Its  social  effects,  on  the  contrary,  are  beneficial,  because  it  places  a  heavy 
load  only  on  strong  shoulders.  Even  for  men  of  large  means  engaged  in 
business  it  is  a  tax  to  be  strongly  recommended,  for  such  men  will  in 
some  years  make  little  or  nothing,  or  even  lose  money.  Now,  our  property 
tax  is  merciless;  it  exacts  as  much  in  a  year  when  a  business  man  is 
struggling  to  keep  his  head  above  water  as  in  a  year  of  rare  prosperity; 
whereas  the  income  tax  exacts  much  only  when  much  can  be  given  without 
financial  embarrassment.  If  it  were  practicable  to  substitute  an  income 
tax  for  the  whole  of  the  property  tax  it  would  save  many  a  man  from 
bankruptcy.  I  will  repeat,  with  some  modification,  in  this  connection, 
words  I  used  in  my  special  report  as  member  of  the  Baltimore  Tax  Com- 
mission: 

"It  is  the  fairest  tax  ever  devised;  it  places  a  heavy  burden  when 
and  where  there  is  strength  to  bear  it,  and  lightens  the  load  in  case  of 
temporary  or  permanent  weakness.  Large  property  does  not  always 
imply  ability  to  pay  taxes,  as  taxes  should  come  from  income;  even  when 
assessed  on  property  it  is  only  an  indirect  device  for  estimating  income. 
An  income  tax  spares  the  business  man  in  season  of  distress  and  helps 
him  to  weather  tire  storm,  but  asks  a  return  for  the  consideration  shown 
in  days  of  increasing  prosperity." 

Moreover,  as  we  have  repeatedly  stated  throughout  this 
report,  property  is  not  a  fair  test  of  ability  to  pay,  and  this  is 
particularly  true  in  the  case  of  merchants  and  manufacturers. 
We  again  desire  to  emphasize,  that  the  amount  of  stock  of 
goods  on  hand  or  the  capital  value  of  the  property  does  not 
adequately  measure  earning  capacity  for  the  purpose  of  taxation, 


TAXATION  285 

and  that  we  know  of  no  fairer  way  of  determining  what  should 
be  the  proper  contribution  of  an  individual  corporation  than  by 
considering  its  net  earnings.  This  is  all  the  more  true  when  we 
consider  that  it  takes,  in  some  instances,  several  years  for  a 
business  to  develop  to  the  point  that  it  can  pay  a  return  upon  the 
original  investment.  It  is  neither  good  policy  nor  sound  finance 
to  overtax  an  infant  industry,  nor,  for  that  matter,  even  an 
established  industry,  in  bad  times.  Taxes  are  paid  out  of  income, 
and  one  of  the  great  advantages  of  an  income  tax  as  a  business 
tax  is  that  it  levies  tribute  only  when  there  is  an  income  from 
which  to  pay  it.  That  the  income  tax  is  the  best  way  of  taxing 
both  individuals  engaged  in  business  and  general  business  corpo- 
rations, was  the  opinion  of  practically  every  business  man  that 
appeared  before  our  Committee,  and  of  the  Tax  Committees 
of  such  representative  commercial  bodies  as  the  Chamber  of 
Commerce  of  the  City  of  Rochester,  of  the  Merchants  Asso- 
ciation of  the  City  of  New  York,  and  the  Chamber  of  Commerce 
of  the  City  of  New  York. 

The  income  tax  is  the  only  tax  that  will  reach  that  great 
class  of  people  who  do  business  in  New  York  City,  enjoying  all 
of  its  commercial  and  other  advantages  on  the  same  basis  as  a 
citizen  of  the  state,  and  who,  under  the  present  law,  pay  no 
taxes  whatsoever. 

One  of  the  chief  difficulties  of  our  present  system  is  the 
varying  rates  in  different  localities  which  tend  to  produce  grave 
inequalities  as  between  towns  and  between  the  residents  of  dif- 
ferent towns.  The  tendency,  of  course,  is  for  taxpayers  to 
establish  a  real  or  fictitious  residence  in  that  locality  where  the 
rate  is  lowest,  and  this  inevitably  results  in  injustice  to  the 
other  less  fortunate  towns  and  their  taxpayers.  By  the  estab- 
lishment of  a  uniform  rate  throughout  the  state,  the  income 
tax  will  do  away  with  this  situation  entirely.  "Isles  of  safety" 
and  favorite  places  of  residence  will  disappear,  and  individuals 
and  corporations  will  all  meet  on  an  equal  and  fair  basis,  subject 
to  a  just  burden,  and  with  the  full  knowledge  that  it  is  common 
to  all  and  that  there  are  neither  a  fortunate  many  nor  an 
unfortunate  few. 

To  equalize  the  burden  is  the  principal  function  for  which 
this  Committee  was  appointed.  Certain  classes  of  property  are 
today  paying  too  much,  others  too  little.  No  equality  can  exist 
until  those  paying  too  little  are  compelled  to  pay  their  share 


286  SELECTED   ARTICLES 

It  seems  to  us  that  the  income  tax  meets  these  requirements. 
The  Committee  has  caused  to  be  made  various  estimates  as 
to  the  possible  yield  of  an  income  tax  in  the  state  of  New 
York.  Different  methods  have  been  used,  and  a  number  of 
experts  have  made  various  estimates  based  on  these  different 
methods.  The  results  in  each  case  are  not  far  apart.  All  tend 
to  indicate  that  a  corporation  tax  as  outlined  in  the  attached 
bill  would  yield  in  1916,  at  a  I  per  cent  rate,  approximately, 
$9,000,000;  at  2  per  cent,  approximately,  $18,000,000;  and  at  3 
per  cent,  approximately  $27,000,000.  In  the  year  1917,  at  i  per 
cent,  approximately,  $9,000,000;  at  2  per  cent,  approximately, 
$19,000,000;  and  at  3  per  cent,  approximately,  $29,000,000. 

The  estimate  of  the  yield  from  the  individual  income  tax  at 
the  rates  contained  in  the  attached  bill  is  as  follows: 

1916    $18,000,000,  approximately 

1917    19,000,000,  approximately 

From  these  amounts  would  have  to  be  deducted,  however, 
the  present  revenue  derived  under  section  182  from  the  corpo- 
rations that  would  be  subject  to  the  income  tax,  which  corpo- 
rations, by  the  terms  of  the  attached  bill,  would  be  relieved 
from  payments  under  section  182.  The  state  would  then,  out 
of  the  total  amount  collected,  retain  a  little  over  $2,000,000,  plus 
the  cost  of  administration;  and  the  balance,  under  the  terms  of 
the  bill,  would  be  returned  to  the  localities.  This  balance,  in 
1917,  would  amount  to  over  $44,000,000.  In  considering  the  net 
gain  to  the  localities  over  the  present  system,  we  would  have 
to  take  into  consideration  the  loss  of  approximately  $6,000,000, 
at  present  derived  from  the  personal  property  tax.  After  allow- 
ing for  all  these  deductions  there  would  still  be  a  net  gain  of 
$38,000,000,  to  be  distributed  to  the  localities  with  a  view  to 
equalizing  the  present  burden  of  taxation  by  relieving  real  estate 
and  such  other  forms  of  wealth  as  are  now  contributing  more 
than  their  share.  We  give  in  the  appendix  a  table  showing 
the  amount  which  would  be  received  by  each  county  if  the 
$38,000,000  were  distributed  on  the  basis  of  the  assessed  values 
of  real  estate  for  the  year  1914.  This  table  shows  beyond  any 
question  that  there  is  not  a  county  in  the  state  that  would  not  be 
infinitely  better  off  than  it  is  today. 

The  suggested  method  of  distribution  according  to  assessed 
values  in  each  county  is  novel,  but  it  has  these  advantages: 


TAXATION  287 

1.  It   will   avoid   the   difficulty   which   would   arise   if    each 
locality  were  permitted  to  retain  the  tax  paid  by  residents  of 
that   district.     Under  this   latter  method   some   districts,  where 
many  rich   men  have   established  a   residence,   or  where  many 
prosperous  corporations  are  located,  would  have  more  revenue 
than    they    could    use,    while    others,    whose    inhabitants    enjoy 
smaller  incomes,  would  receive  little  or  no  revenue. 

2.  The  new  method  will  tend  to  encourage  the  raising  of 
real  estate  assessments  to  a  point  approaching  true  value. 

3.  It  will  meet  the  criticism  made  of  an  income  tax  to  the 
effect  that,  although  the  rate  is  usually  low  at  the  start,  there 
is  a   constant  temptation   to   raise  it   in   order  to   obtain  more 
revenue.    Under  the  proposed  system  there  will  be  no  temptation 
on  the  part  of  the  Legislature  to  raise  the  rate,  inasmuch  as  the 
state  will  not  profit,  while  it  is  hardly  probable  that  all  of  the 
localities,  or  even  a  majority  of  them,  will  unite  at  one  time 
in  demanding  an  increase,  or  at  least  such  a  situation  will  not 
occur  unless  the  increase  is  fully  warranted  by  the  general  cir- 
cumstances. 

It  is  sometimes  said  that  the  income  tax  is  inquisitorial,  but 
it  will  be  noted  that  the  bill  hereto  attached  makes  it  possible 
for  the  taxpayer  to  file  with  the  State  authorities  a  return  which 
is,  for  all  practical  purposes,'  a  duplicate  of  the  information 
already  furnished  to  the  Federal  government,  together  with  such 
additional  information  as  may  be  necessary  for  state  purposes. 
We  hear  little  or  no  complaint  today  as  to  the  inquisitorial  fea- 
tures of  the  Federal  income  tax.  People  have  become  ac- 
customed to  it.  Nor  do  we  feel  that  there  will  be  any  great  re- 
luctance to  disclose  to  the  state  authorities  information  already 
furnished  by  the  Federal  government,  particularly  under  a  law 
which  provides  severe  penalties  for  the  disclosure  of  any  infor- 
mation by  the  public  officers. 

Again  others  object  to  a  state  income  tax  on  the  ground  that 
there  is  already  a  Federal  income  tax.  But  let  us  analyze  the 
objection.  There  is  no  question  that,  in  addition  to  the  Federal 
income  tax,  personal  property  must  contribute  its  quota  to  the 
support  of  the  state  government.  Is  it  better  to  impose  a  2  per 
cent  property  tax  on  capital  value,  or  to  impose  a  2  per  cent  tax 
on  net  income?  We  can  hardly  assume  that  the  state  will  con- 
tinue to  allow  the  personal  property  tax  to  remain  on  the  statute 
books  and  to  permit  its  evasion.  And  so  the  choice  does  not  lie 
between  no  tax  and  some  new  form  of  taxation  such  as  the 


288  SELECTED   ARTICLES 

income  tax,  but  between  a  continuance  of  the  present  hopeless 
system,  and  some  better  and  more  equitable  way  of  raising 
revenue.  If  such  a  latter  plan  can  be  devised,  are  we  to  reject 
it  because  it  is  already  employed  by  the  Federal  government, 
and  in  order  to  avoid  duplication,  continue  to  tax  the  same 
property  in  a  manner  which  we  admit  ourselves  to  be  inequitable, 
and  to  be  a  failure? 

Finally,  it  is  often  said,  that  while  theoretically  sound,  the 
income  tax  will  not  work  in  practice.  This  may  have  been  true 
prior  to  the  enactment  of  the  Federal  Income  Tax  Law,  but  this 
law  is  of  immense  help  to  any  state  desiring  to  impose  an  in- 
come tax;  and  for  two  reasons.  In  the  first  place,  many  people 
are  already  accustomed  to  it,  they  understand  its  workings  and 
will  not  resist  its  enforcement;  and  in  the  second  place,  the  fact 
that  the  Federal  government  requires  a  return,  and  has  the  ma- 
chinery to  check  up  that  return  in  a  strictly  accurate  manner, 
makes  the  evasion  of  the  state  income  tax  a  matter  of  no  little 
difficulty  and  danger.  In  so  far  as  corporations  are  concerned, 
the  Federal  law  today  permits  a  state  to  examine  the  returns. 
A  similar  provision  in  so  far  as  individuals  are  concerned,  could 
probably  be  obtained  from  the  Federal  government.  But  in  the 
meanwhile  it  seems  to  us  highly  doubtful  whether  any  individual 
having  already  filed  a  correct  statement  with  the  Federal  gov- 
ernment would  be  foolhardy  enough  to  file  an  incorrect  dupli- 
cate with  the  state  authorities. 

The  income  tax  will  work  in  practice.  It  has  been  success- 
fully administered  in  practically  every  European  country  for  a 
great  number  of  years.  The  Federal  income  tax  works,  and 
the  Wisconsin  experiment  has  conclusively  demonstrated  that 
with  a  good  administration  a  state  income  tax  does  work.  There 
seems  to  be,  moreover,  a  strong  movement  in  favor  of  such  a 
tax  throughout  the  country.  Connecticut  and'  West  Virginia 
both  adopted  an  income  tax,  in  so  far  as  corporations  are  con- 
cerned, last  winter,  while  the  people  of  Massachusetts,  by  a-  vote 
of  almost  three  to  one,  adopted  at  the  last  election  an  amend- 
ment which  permits  the  imposition  of  such  a  tax  in  the  state  of 
Massachusetts.  Practically  every  witness  that  appeared  before 
our  Committee — and  the  list  included  representatives  of  leading 
commercial  and  business  organizations,  as  well  as  tax  experts, 
business  men  and  individuals  from  many  walks  of  life — advo- 
cated the  abolition  of  the  personal  property  tax  and  the  substi- 
tution therefore  of  the  income  tax. 


TAXATION  289 


THE  INCOME  TAX1 

No  question  before  the  Convention  is  as  misunderstood  as  is 
this  form  of  taxation.  Some  oppose  it  on  the  ground  that  taxes 
are  high  enough  at  present,  and,  consequently,  should  not  be 
further  increased.  This,  of  course,  is  a  fallacious  line  of  reason- 
ing, and  entirely  omits  those  practical  aspects  of  the  question 
that  should  receive  the  serious  consideration  of  all  thoughtful 
men.  We  are  not,  moreover,  attempting  to  increase  taxes;  we 
are  as  much  interested  in  seeing  them  reduced,  if  possible,  as  any- 
one else  is;  but  what  we  are  endeavoring  to  do  is  to  solve  the 
question  of  an  equitable  distribution  of  the  present  burdens  that 
the  people  themselves  have  voluntarily  assumed. 

The  income  tax  is  denned  by  Thomas  E.  Lyons,  a  member  of 
the  Wisconsin  Tax  Commission,  as  follows: 

An  income  tax  is  a  direct  levy  by  a  government  upon  the  income  of 
individual  citizens  whether  that  income  is  received  from  labor,  industry, 
investment,  real  estate  or  any  other  source,  computed  annually  or  at 
stated  intervals, — Bliss  Encyclopedia  of  Social  Reform,  600.  It  is  in  effect 
a  tax  based  upon  and  measured  by  the  earnings  of  person  or  property, 
or  of  both  combined. 

Income  taxes  differ  from  property  taxes  which  are  either  imposed 
upon  property  direct  and  become  a  lien  thereon,  as  in  the  case  of  real 
estate,  or  are  made  a  charge  against  the  person  by  reason  of  ownership, 
as  in  the  case  of  personal  property,  regardless  of  productiveness  except 
as  that  element  may  be  reflected  in  market  value.  They  differ  from 
occupation  and  other  excise  taxes  which  are  exactions  for  engaging  in 
particular  lines  of  business  or  in  an  ordinary  line  of  business  in  a 
particular  way;  and  they  differ  from  consumption  taxes,  which  are  meas- 
ured by  expenditure. 

Income  taxes  are  not  levied  upon  property  nor  upon  the  operations 
of  trade  and  business,  or  the  persons  employed  therein;  nor  upon  the 
practice  of  a  profession  or  the  pursuit  of  a  trade  or  calling.  They  are 
taxes  levied  upon  the  acquisitions  arising  from  one  or  more  of  these 
sources.  Ordinarily  the  tax  is  based  upon  the  excess  of  such  acquisition 
for  a  given  period  over  a  certain  minimum  sum  called  an  exemption. 
They  are,  therefore,  taxes  upon  the  periodical  accretions  produced  by 
personal  effort  or  from  the  use  or  disposition  of  property  or  of  all  these 
combined. 

It  is  also  contended  that  this  is  a  source  of  revenue  which 
has  been  "pre-empted"  by  the  Federal  Government,  and  should 
not,  therefore,  be  touched  by  the  state.  Such  a  contention  has 
no  foundation  either  in  theory  or  fact.  We  believe  that  it  is  a 
well  understood  fact  among  all  tax  authorities  and  financiers 
that  a  tax  on  income  is  not  an  independent  source  of  revenue — 
there  can  be  only  one  source  of  revenue,  ordinarily  speaking, 
and  that  is  income,  out  of  which  all  taxes  of  whatever  nature  are 

1  Report  of  the  Louisiana  Assessment  and  Taxation  Commission  to  the 
Constitutional  Convention.  1921.  p.  33-48. 


290  SELECTED  ARTICLES 

paid— and  the  income  tax  is  but  a  method  of  determining,  just 
as  the  general  property  tax  attempts  to  determine,  how  much 
each  citizen  should  contribute  to  the  support  of  the  government. 
The  Assessment  and  Taxation  Commission  of  the  Province 
of  Manitoba,  in  its  report,  made  in  1919,  on  that  phase  of  the 
question  in  the  Dominion  of  Canada,  said : 

The  objection  taken  by  some  witnesses  before  this  Commission  to  the 
adoption  of  a  Provincial  Income  Tax  in  Manitoba  for  municipal  pur- 
poses, that  it  would  compete  with  the  Dominion  Income  Tax,  and  so 
lessen  its  productiveness,  rests  on  a  singular  misapprehension.  The 
sources  of  tax  revenue  are  not  watertight  compartments.  Every  tax, 
whether  Federal,  Provincial,  or  Municipal,  imposed  directly  on  the  income, 
taxpaying  classes,  or  indirectly  shifted  by  competition  to  them,  so  far 
tends  to  lessen  the  income  on  which  taxation  can  be  levied.  For  all  taxes 
fall  on  persons,  though  in  many  cases  nominally  imposed  on  things;  all 
are  in  the  long  run  open  or  disguised  income  taxes.  Indeed  most  taxes 
take  more  out  of  income  than  if  they  are  levied  directly  on  it.  An 
income  tax  in  this  respect  differs  fundamentally  from  a  tax  on  a  par- 
ticular commodity. 

In  "The  Science  of  Finance,"  by  Professor  Adams  of  the 
University  of  Michigan,  we  find  the  following : 

Speaking  analytically,  all  taxes  must  be  paid  out  of  income,  and  if 
properly  understood,  out  of  net  income.  The  word  income  needs  no 
further  definition  than  that  implied  in  the  definition  of  a  tax  already 
given,  which  asserts  that  a  tax  is  a  derivative  revenue.  The  rent,  the 
royalty,  the  interest,  the  dividends,  the  profit,  the  salary,  the  wages — 
these  are  all  funds  which,  according  to  the  phraseology  of  contracts, 
stand  for  income.  It  thus  appears  that  an  income  is  a  sum  of  money 
which  comes  in  to  an  individual  or  corporation  during  a  definite  period 
of  industrial  activity.  We  may  assume  this  period  to  be  the  year.  It 
is  then  the  amount  which  during  the  year  will  come  to  be  at  the  disposal 
of  the  citizen,  and  which  may  be  used  in  current  expenditures  or  in  an 
extension  of  investments.  From  the  individual  point  of  view,  therefore, 
it  is  the  net  income  and  not  the  gross  income  to  which  the  state  must 
appeal.  It  is  the  income  that  limits  domestic  expenditure,  and  not  the 
income  that  measures  the  volume  of  business,  that  must  be  made  the 
sources  of  payment  to  the  state.  The  phrase  gross  income  cannot  prop- 
erly be  employed  except  for  a  business  which  has  operating  expenses.  To 
accept  gross  income  as  the  measure  of  the  possible  expenditures  for  con- 
sumption in  any  direction  whatever  has  been  the  first  step  to  the  ruin 
of  many  a  business  man.  A  tax,  therefore,  whether  in  the  form  of  an 
income  tax,  a  property  tax,  or  any  kind  of  a  tax  whatever,  must,  so 
far  as  the  individual  is  concerned,  come  from  the  net  income,  for  the 
same  reason  that  rent  or  payment  of  the  grocer  must  come  from  that 
fund.  This  is  in  harmony  with  the  idea  entertained  throughout  this 
treatise,  that  a  tax  is,  or  at  least  should  be,  a  necessary  item  in  every 
domestic  budget.  It  is  true  that  a  tax  may  be  paid  out  of  the  saved  in- 
come of  past  years;  but  such  a  practice  could  not  be  followed  very  long 
without  ruin,  and  on  this  account  the  contingency  is  not  recognized  in 
the  discussion  which  assumes  an  annual  payment  in  perpetuity.  The  rev- 
enue of  a  state  must  flow  from  the  product  of  current  industry,  and  in 
so  far  as  the  state  permits  this  product  to  be  distributed  among  pro- 
ducers before  it  demands  its  share  (that  is  to  say,  in  the  case  of  derivative 
as  distinguished  from  direct  revenue")  the  fund  from  which  this  revenue 
is  derived  must  be  a  net  revenue  of  citizens. 

A  tax  on  income  is  a  very  simple  tax  both  in  legislative  form  and 
in  the  reasons  urged  for  its  support.  In  form  the  law  demands  the  cash 


TAXATION  291 

payment  of  a  certain  per  cent  of  the  annual  clear  income  of  each  citizen. 
The  payment  is  supposed  to  rest  where  the  charge  is  placed,  and  in  the 
vast  number  of  instances  this  will  be  the  case.  Assuming  the  ability  to 
pay  to  be  the  just  measure  of  payment,  income  is  accepted  as  the  surest 
test  of  ability.  In  years  when  business  is  prosperous  the  payment  would 
be  large;  in  years  of  depression  the  payment  would  be  small.  From  the 
point  of  view  of  the  citizen  nothing  could  be  more  considerate  and  no 
tax  more  easily  borne.  The  demand  of  the  state  would  increase  or  de- 
crease as  the  fund  from  which  the  payment  is  made  increases  or  de- 
creases. This  is  not  presented  as  an  argument  either  for  or  against  an 
income  tax,  but  rather,  to  show  the  simplicity  of  the  idea  underlying  it. 
Speaking  logically  (not  historically),  the  income  tax  is  the  original  tax, 
and  all  other  taxes  are  complementary  to  or  a  substitute  for  this  tax  in 
those  points  in  which  it  is  difficult  of  application ;  for  this  assumption  at 
least  permits  the  student  to  appreciate  most  easily  and  naturally  the  re- 
lation existing  between  the  various  sorts  of  taxes. 

Income  taxation,  it  must  be  conceded,  is  no  new  or  untried 
form  of  raising  revenue  for  public  purposes.  It  is  now  in  suc- 
cessful operation  in,  and  has  been  permanently  adopted  as  a 
part  of  the  fiscal  system  of,  nearly  all  of  the  European  countries, 
several  of  the  states  and  the  Federal  Government  of  the  Amer- 
ican Union.  Wisconsin  was  one  of  the  first  states  to  adopt  an 
income  tax;  and,  in  1912,  the  Tax  Commission  of  Minnesota, 
desiring  to  recommend  the  adoption  of  an  income  tax  for  that 
state,  made  a  complete  and  thorough  investigation  of  the  Wis- 
consin system.  We  quote  from  their  1912  report,  at  page  159: 

RESULTS  OF  THE  FIRST  YEAR 

In  point  of  revenue  the  income  tax  law  in  Wisconsin  has  in  its  first 
year  more  than  met  the  expectations  of  its  advocates.  The  income  tax 
assessed  this  year  will  exceed  $3,000,000.  This  is  quite  a  remarkable 
showing  for  the  first  year,  especially  when  compared  with  results  obtained 
in  other  states  that  have  experimented  with  similar  laws.  It  even  exceeds 
the  amount  collected  under  the  first  federal  income  tax  law  in  1863  by 
more  than  $550,000,  although  that  law  applied  to  the  entire  country. 

Of  the  total  tax,  corporations  will  contribute  about  $2,200,000,  or 
nearly  66  ^  per  cent  of  the  total,  and  individuals  and  firms  about 
$1,100,000,  or  33%  per  cent  of  the  total  tax.  It  is  estimated  that  the 
average  rate  on  corporations  will  be  between  5  and  6  per  cent,  while 
the  rate  on  individuals  and  firms  will  be  slightly  in  excess  of  2  per  cent. 

The  preceding  figures  represent  the  total  income  tax  assessed  from 
which,  of  course,  a  very  considerable  deduction  will  be  made  for  taxes 
paid  on  personal  property.  No  accurate  data  is  yet  available  as  to  how 
much  this  offset  will  be,  but  from  investigations  already  made  it  is  esti- 
mated that  the  net  tax  on  individuals  will  be  about  80  per  cent,  and  on 
corporations  about  50  per  cent  of  the  total  income  tax  assessed.  On  this 
basis  the  income  tax  will  yield  net  above  the  personalty  offset  about 
$1,980,000,  of  which  amount  the  state  will  receive  $198,000,  the  counties 
$396,000,  and  the  towns,  cities  and  villages  $1,387,000.  These  amounts 
represent  clear  gains  in  public  revenues  resulting  from  the  income  tax 
law. 

The  advocates  of  the  income  tax  have  always  contended  that  even- 
tually such  a  tax  would  enable  the  state  to  exempt  personal  property 
from  taxation,  except  public  utilities  and  banks,  without  impairing  the 
public  revenues.  This  could  almost  be  done  the  first  year.  The  entire 
tax  levied  on  personal  property  this  year  is  estimated  to  yield  about 


292  SELECTED   ARTICLES 

$4,100,000,  an  amount  only  about  $800,000  in  excess  of  the  income  tax. 
It  is  not  improbable  that  within  the  next  two  or  three  years  the  per- 
sonal property  tax  with  the  exceptions  above  indicated,  could  be  entirely 
abolished  without  any  diminution  in  the  public  revenues. 

DISTRIBUTION   OF   THE  TAX  BURDEN    UNDER   THE   INCOME  TAX 

A  study  of  the  amount  of  income  tax  assessed  against  individuals  in 
urban  and  rural  districts  shows,  as  would  be  expected,  that  the  income 
tax  per  person  assessed  is  much  larger  in  cities  than  in  the  rural  districts. 
There  were  45,638  persons,  exclusive  of  corporations,  assessed  for  income 
in  the  state,  the  average  tax  being  $24.33.  Dividing  the  seventy-one 
counties  of  the  state  into  two  groups,  the  first  embracing  seventeen  coun- 
ties containing  all  of  the  cities  of  the  first,  second  and  third  classes,  and 
the  second  the  remaining  fifty-four  counties  containing  a  large  percentage 
of  rural  population,  we  find  that  in  the  former  the  average  tax  is  $27.73 
per  taxpayer,  while  in  the  second  class  the  average  is  $15.20  per  tax- 
payer. Basing  the  tax  on  population,  the  difference  between  the  two 
groups  is  still  greater,  the  former  paying  76*4c.  and  the  latter  i6%c.  per 
capita. 

An  analysis  of  the  income  tax  assessment  in  five  selected  counties — 
Dodge,  Chippewa,  Rusk,  Marathon  and  Dane — discloses  some  interesting 
data  on  the  distribution  of  the  tax  burden  under  an  income  tax.  The 
total  amount  assessed  in  these  five  counties  amounts  to  $250,571.  The 
offset  for  personal  property  taxes,  based  on  1911,  will  amount  to  $101,242, 
leaving  a  net  income  tax  of  $149,329.  Of  this  amount  corporations  will 
contribute  $93,172,  or  62.4  per  cent,  and  firms  and  individuals  $56,157, 
or  37.6  per  cent.  Dividing  the  37.6  per  cent  paid  by  others  than  cor- 
porations, we  find  that  the  increase  over  personal  property  taxes  will  be 
less  than  i  per  cent  for  the  farmers  assessed  for  income,  about  3%  per 
cent  for  merchants,  8  per  cent  for  manufacturers,  and  a  little  over  1 1 
per  cent  for  the  professional  classes,  as  compared  with  the  62.4  per  cent 
paid  by  corporations. 

A  comparison  of  the  average  income  tax  of  each  individual  taxpayer 
with  the  average  personal  property  tax  paid  last  year  in  the  different  in- 
come classes  in  the  same  group  of  counties  is  equally  interesting.  The  total 
number  of  income  assessments  in  this  group  of  counties  is  five  thousand, 
one  hundred  sixty.  The  average  income  tax  in  the  group  is  approxi- 
mately $49  per  individual  taxpayer.  Last  year  the  average  personal  prop- 
erty tax  was  $37  per  taxpayer,  showing  an  average  increase  of  $12  per 
person  on  income  over  personal  property  taxes.  The  greater  part  of  this 
increase,  however,  is  on  incomes  of  $3,000  and  over.  In  other  words, 
the  increase  falls  on  those  able  to  pay — on  the  rich  rather  than  on  the 
poor.  For  example,  those  having  no  taxable  income  would  pay  nothing 
if  personal  property  taxes  were  abolished;  those  having  taxable  incomes 
of  less  than  $1,000  would  pav  $2  less  than  they  are  now  paying  in  per- 
sonal property  taxes,  while  those  having  taxable  incomes  under  $2,000 
would  pay  approximately  the  same  as  they  are  now  paying.  The  in- 
crease on  incomes  under  $3,000  would  be  about  $5;  on  incomes  under 
$4,000  the  increase  would  be  $68,  while  on  incomes  of  $10,000  and  over 
the  increase  would  exceed  $600.  These  are  significant  figures  and  indi- 
cate that  if  income  is  the  correct  measure  of  ability  to  pay,  the  Wis- 
consin income  tax  law  is  working  admirably  in  this  group  of  counties. 

COST  OF  ADMINISTRATION 

The  cost  of  making  the  income  tax  assessment  will  be  less  than  $90,000 
this  year.  This  is  a  low  figure  when  it  is  considered  that  any  new 
system  of  taxation  is  generally  more  costly  in  administration  the  first 
than  in  subsequent  years  because  of  the  extra  expense  incident  to  the 
inauguration  of  new  taxing  machinery.  The  net  cost,  however,  will  be 
much  less  than  the  above  figures  would  indicate.  In  addition  to  assessing 
incomes  the  income  tax  assessors  also  perform  the  duties  formerly  en- 
trusted to  the  supervisors  of  assessment,  the  latter  office  having  been 
abolished.  This  in  itself  is  a  strong  feature  of  the  new  law  and  has  re- 
sulted in  a  decided  improvement  in  the  assessment  of  the  general  property 


TAXATION  293 

of  the  state.  This  change  effects  a  saving  of  about  $55,000  in  salaries, 
leaving  the  net  cosf  of  the  income  tax  assessment  about  $35,000,  or  a 
trifle  over  i  per  cent  of  tfie  yield. 

CENTRALIZED  ADMINISTRATION  THE   STRONG  FEATURE  OF   THE  LAW 

Centralized  administration  is  the  strong  feature  of  the  Wisconsin  in- 
come tax  law  and  much  of  its  success  is  undoubtedly  due  to  this  im- 
portant provision.  It  is  also  strong  in  many  other  features  not  heretofore 
included  in  the  income  tax  laws  of  other  states.  They  are  thus  sum- 
marized by  a  member  of  the  Wisconsin  state  tax  commission: 

"In  the  minds  of  practically  everybody  connected  with  the  adminis- 
tration of  the  Wisconsin  tax,  three  more  or  less  novel  conclusions  have 
been  established  beyond  reasonable  doubt. 

"First,  the  American  taxpayer  is  honest  and  will  tell  the  truth  pro- 
vided you  take  the  trouble  to  ask  him  direct  questions  and  provided  the 
rate  of  taxation  is  reasonable  and  not — as  the  ordinary  property  tax  rate 
is  on  securities — confiscatory.  The  maximum  rate  under  the  Wisconsin 
income  tax  is  6  per  cent,  whereas  the  old  property  tax  frequently  took 
from  20  to  60  per  cent  of  the  net  income  from  credits  when  by  some 
unhappy  chance  the  assessor  happened  to  find  them. 

"And  the  Wisconsin  assessors  have  asked  specific  and  direct  ques- 
tions. These  assessors  themselves  constitute  a  new  phenomena  in  American 
financial  history.  They  were  selected  through  the  Wisconsin  Civil  Service 
Commission  after  tests  based  on  merit  and  efficiency  alone;  they  hold 
office  practically  during  good  behavior;  they  are  paid  fair  though  not 
generous  salaries;  and  they  give  practically  their  entire  time  to  the  work. 
Nothing  was  known  of  their  politics  before  their  appointment  by  the  state 
tax  commission,  but  enough  is  known  now  to  say  that  there  are  among 
the  assessors  republicans,  democrats,  socialists  and  prohibitionists.  They 
work  under  the  control  and  direction  of  the  state  tax  commission.  So 
long  as  they  do  their  work  fearlessly,  impartially  and  tactfully  they  will 
keep  their  places  regardless  of  politics. 

"The  second  conviction  noted  above  is  simply  that  the  idea  of  col- 
lection at  source  has  been  greatly  exaggerated.  A  very  large  majority  of 
the  stockholders  of  the  corporations  represented  in  any  state  live  in  the 
state.  With  respect  to  these  the  tax  can  be  collected  at  the  source.  More- 
over, every  corporation  doing  business  in  a  state  can  be,  and  in  Wis- 
consin has  been,  asked  to  report  all  the  stockholders  and  salaried  em- 
ployees living  in  Wisconsin  with  the  dividends  and  salaries  paid  to  them, 
respectively.  Furthermore,  corporation  bonds  may  be  defined  as  an  in- 
terest in  the  business  and  the  tax  is  collected  directly  from  the  corporation, 
the  corporation  being  authorized  to  deduct  the  tax  from  the  interest  when 
it  has  not  covenanted  to  pay  the  tax  itself.  This  has  been  done  in  Wis- 
consin. The  remaining  forms  of  income  will  be  taken  care  of  by  the 
honesty  of  the  average  taxpayer  when  the  rate  is  reasonable. 

"This  surprising  notion  of  the  honesty  of  the  taxpayer  is  not  mere 
sentimentalism  and  not  mere  buncombe.  It  is  completely  borne  out  by 
the  facts.  The  impression  of  practically  everybody  connected  with  the 
administration  of  the  Wisconsin  income  tax  is  that  more  than  90  per  cent 
of  the  net  income  theoretically  taxable  under  the  Wisconsin  law  has  been 
voluntarily  returned.  Border  line  questions  have  in  many  cases  been 
decided  in  favor  of  the  taxpayer,  and  there  has  been  considerable  uncer- 
tainty about  difficult,  doubtful  points,  but  in  the  large  majority  of  in- 
stances attention  has  been  voluntarily  directed  to  these  points,  and  almost 
never  has  any  attempt  to  conceal  the  facts  been  encountered  when  the 
taxpayer  was  questioned.  The  assessors  did  not  predict  this;  they  did 
not  expect  it;  but  they  now  know  it. 

"The  third  novel  conclusion  is  that  a  state  income  has,  as  contrasted 
with  the  federal  income  tax,  more  natural  advantages  than  disadvantages. 
It  may  have  where  properly  administered,  and  does  have  in  Wisconsin, 
ten  times  the  local  knowledge  because  it  can  have  ten  times  the  number 
of  assessors  by  combining  the  machinery  of  the  general  tax  system  with 
the  machinery  of  ihe  income  tax.  In  literally  hundreds  of  cases  the 
writer  has  discovered  that  reports  under  the  Wisconsin  income  tax  were 
more  carefully  made  than  under  the  federal  corporation  excise  tax  and 


294  SELECTED   ARTICLES 

fewer  doubtful  questions  decided  in  favor  of  the  taxpayer.  In  Wis- 
consin taxpayer  A  is  used  to  check  the  accuracy  of  taxpayer  B.  What 
is  outgo  to  B  is  income  to  A.  B  is  asked  to  tell  with  respect  to  certain 
important  items  of  outgo  the  names  and  addresses  of  the  recipients.  There 
is  thus  a  cross-check  of  which  the  Federal  Government  could  probably 
not  avail  itself.  In  any  event,  the  writer  feels  certain  that  the  assessment 
rolls  of  Wisconsin  now  record  a  higher  percentage  of  actual  taxable  in- 
come than  the  Federal  Government  has  on  that  part  of  its  records  which 
cover  the  same  taxpayers. 

".  .  .  The  great  majority  of  the  people  of  Wisconsin  are  more  than 
satisfied  with  the  income  tax  and  if  it  is  repealed  it  will  be  due  to  general 
political  complications,  not  to  dissatisfaction  with  the  operation  of  the  law 
itself.  Moreover,  the  state  income  tax  has  come  to  stay.  Wisconsin 
itself  is  not  naturally  particularly  good  soil  for  the  income  tax,  which 
thrives  best  in  urban  and  thickly  populated  communities.  If  Wisconsin 
can  do  so  well  with  the  tax,  urban  states  like  Massachusetts,  Connecticut, 
Rhode  Island  and  the  like  could  do  infinitely  better.  Let  one  such  com- 
monwealth try  the  state  income  tax  and  its  possibilities  will  cease  to  be 
a  matter  of  dispute.  It  will  spread  like  wildfire." 

CONCLUSIONS 

That  the  Wisconsin  income  tax  law  has  been  a  remarkable  success 
for  the  first  year  is  now  generally  admitted.  Not  only  has  it  resulted  in  a 
large  increase  in  revenue,  but  it  has  unquestionably  distributed  the  tax 
burdens  more  equitably  among  those  able  to  bear  them  than  ever  before 
in  the  history  of  the  state.  Under  its  provisions  a  considerable  amount 
of  the  public  revenue  will  come  from  people  of  large  incomes,  many  of 
whom  have  heretofore  contributed  but  little  to  the  expense  of  govern- 
ment. If  income  furnishes  the  proper  measure  of  the  taxable  capacity 
of  people,  the  Wisconsin  income  tax  law  is  a  long  step  in  the  direction 
of  greater  justice  in  taxation. 

Nevertheless,  while  the  success  of  Wisconsin  in  its  first  year's  ex- 
perience with  a  state  income  tax  has  far  exceeded  the  expectations  of  its 
advocates,  yet  it  could  scarcely  be  claimed  that  one  year  is  sufficient  time 
in  which  to  fully  test  out  an  old  principle  of  taxation  clothed  in  new  ad- 
ministrative machinery.  A  more  extended  experience  will  probably  sug- 
gest a  number  of  desirable  changes  in  the  law  to  make  it  fit  the  indus- 
trial and  social  conditions  of  the  state.  Its  ultimate  success,  however,  is 
full  of  promise.  Minnesota,  in  common  with  other  states,  will  watch 
with  interest  the  experience  of  Wisconsin  with  its  new  law,  and  if  suc- 
cessful as  we  believe  it  will  be,  this  state  may  eventually  follow  the  ex- 
ample of  its  sister  state  by  incorporating  an  income  tax  law  into  its 
revenue  system. 

The  ultimate  results  of  the  income  tax  in  Wisconsin  have 
even  exceeded  the  expectations  of  its  advocates  in  that  state  and 
in  Minnesota.  In  1920  the  State  of  Wisconsin  levied  approxi- 
mately $12,000,000  on  incomes,  and  as  the  personal  property 
off-set  amounted  to  $5,000,000,  the  net  yield  of  the  income  tax 
for  that  year  amounted  to  $7,000,000.  Ten  per  cent  of  this 
amount  was  retained  by  the  state  and  the  remainder  was  allo- 
cated to  the  various  districts  and  local  subdivisions. 

The  Manitoba  Commission  also  advances  the  opinion  that: 

In  theory  we  believe  this  principle  of  taxation  is  both  attractive  and 
necessary.  Any  system  which  exacts  payment  from  those  that  have  the 
means  to  pay,  relieves  those  that  have  not,  taxes  moderate  incomes 
lightly  and  large  incomes  more  heavily,  makes  strong  appeal  for  popular 
favor,  and  has  much  to  commend  it  on  the  economic  side.  The  income 
tax  principle  was  applied  in  Florence  in  the  fifteenth  century,  and  in 


TAXATION  295 

France  throughout  the  eighteenth  century.  In  1779  it  was  adopted  in 
England,  and  though  discontinued  after  the  close  of  the  war  with  Na- 
poleon, it  was  reintroduccd  by  Sir  Robert  Peel  in  1842.  England's  example 
has  since  been  followed  by  practically  all  the  leading  nations  of  the 
world.  It  has  also  been  introduced,  as  previously  observed,  in  many  of 
the  American  states,  and  is  also  in  use  in  the  Canadian  provinces  of 
Ontario,  British  Columbia  and  Prince  Edward  Island  in  certain  degrees. 
It  will,  therefore,  be  appreciated  that  our  recommendation  for  its  intro- 
duction in  Manitoba  is  not  based  upon  a  hypothetical  foundation. 

Honorable  Thomas  E.  Lyons,  in  address  delivered  at  the 
Blackstone  Institute,  in  1916,  said,  with  respect  to  the  operation 
of  the  income  tax  in  Wisconsin,  that: 

The  conventional  criticism  of  the  income  tax  is  that  it  is  all  right 
in  theory  but  will  not  work  in  practice.  If  this  criticism  is  well  founded 
it  constitutes  a  fatal  objection  to  this  form  of  taxation.  In  last  analysis 
a  fiscal  system  must  be  tested  by  results,  and  the  important  question  is 
how  the  income  tax  actually  operates  in  practice.  The  first  and  most 
obvious  test  of  a  tax  system  is  its  power  to  produce  revenue,  and  the  in- 
come tax  has  completely  met  this  test.  This  is  shown  by  the  fact  that 
the  yield  of  the  tax  in  England  and  Germany  before  the  present  war 
broke  out  exceeded  $200,000,000  annually  in  each  country.  The  assess- 
ment of  1915  income  by  the  Internal  Revenue  Department  at  the  rela- 
tively low  rates  prescribed  by  the  act  of  1913  resulted  in  a  tax  of  $124,- 
937,252.  In  Wisconsin  the  assessment  of  incomes  for  the  same  year 
produced  a  tax  of  $5,344,303.  It  is  estimated  that  the  average  annual  in- 
come of  the  people  of  the  United  States  from  all  sources  is  over  $30,- 
000,000,000  and  that  20  per  cent  of  the  heads  of  families  receive  47  per 
cent  of  this  amount  and  that  2  per  cent  of  them  receive  more  than  20 
per  cent  of  it. — King's  Wealth  and  Income,  132.  The  Internal  Revenue 
Department  reports  that  one  hundred  twenty  persons  in  the  United  States 
received  an  income  of  more  than  $1,000,000  each  in  1915  and  that  the 
aggregate  taxable  income  assessed  for  that  year  was  $8,703,068,389.  These 
figures  amply  demonstrate  the  possibilities  of  this  form  of  taxation  as  a 
revenue  producer. 

A  TAX  ON  WEALTH 

A  study  of  the  returns  under  income  tax  laws  conclusively  shows  that 
the  income  tax  is  a  tax  on  the  rich  and  well-to-do.  The  liberal  exemp- 
tions allowed  by  the  Federal  law  exclude  the  great  bulk  of  the  population 
from  its  operation.  According  to  the  report  of  the  Internal  Revenue  De- 
partment, only  about  %  of  i  per  cent  of  the  population  is  subject  to  the 
tax.  In  Wisconsin,  with  lower  exemptions,  less  than  3  per  cent  of  the 
population  come  within  the  law.  Further  analysis  of  the  returns  indi- 
cates that  the  limited  number  receiving  large  incomes  pay  most  of  the 
tax.  Thus  three  hundred  twenty-nine  out  of  a  total  of  366,443  persons 
assessed  under  the  Federal  income  tax  law  in  1916  paid  about  one-fifth 
of  the  total  tax.  In  Wisconsin  sixty-two  persons  receiving  an  income  of 
over  $50,000  each  paid  23  per  cent  of  the  tax  assessed  against  individuals, 
and  fourteen  out  of  an  aggregate  of  62,272  taxpayers  representing  only 
1/200  of  i  per  cent  of  the  total  number  paid  over  12  per  cent  of  the 
tax.  In  the  county  of  Dane,  in  which  the  capital  is  located,  three  indi- 
viduals receiving  an  income  of  over  $25,000  each  paid  one  and  one-half 
times  as  much  tax  as  the  two  thousand,  two  hundred  fifty  persons  having 
less  than  $  1,000  income  apiece. 

Where  the  earnings  of  corporations  are  assessed  at  the  full  progressive 
rate  as  in  Wisconsin,  they  pay  the  bulk  of  the  tax.  The  aggregate  tax 
assessed  under  the  Wisconsin  law  on  1915  income  was  $5,344,393,  and 
of  this  amount  corporations  were  assessed  for  $3,473,180,  or  70  per  cent 
of  the  total.  While  corporations  paid  only  the  normal  rate  of  i  per  cent 
prescribed  by  the  Federal  law  of  1913,  their  aggregate  tax,  according 
to  the  last  assessment,  was  $56,993,658,  or  about  45  per  cent  of  the  total. 
If  the  income  of  these  corporations  had  been  subject  to  the  full  tax 
prescribed  for  individuals  under  the  same  act,  the  yield  would  probably 


296  SELECTED   ARTICLES 

have  been  five  times  that  amount.  The  total  number  of  corporations 
assessed  in  Dane  County  for  income  of  1915  was  three  hundred  thirty- 
four,  and  the  total  tax  thereon  $133,939,  and  one  corporation  engaged  in 
the  production  of  war  material  paid  $67,642,  or  more  than  one-half  of  this 
total.  As  enterprises  of  this  character  are  generally  located  in  cities,  it 
follows  as  a  corollary  that  the  yield  of  the  income  tax  is  primarily  de- 
rived from  urban  centers.  The  liberal  exemptions  and  relatively  small 
income  received  by  agricultural  classes  practically  exempt  them  from  the 
operation  of  the  law. 

OBJECTIONS  TO  INCOME  TAX 

Complaint  is  often  heard  that  the  income  tax  is  a  class  tax  for  the 
reason  that  so  small  a  part  of  the  population  pays  such  a  large  proportion 
of  the  yield.  But  every  other  tax  is  subject  to  this  criticism,  in  greater 
or  less  degree.  The  general  property  tax  reaches  only  the  comparatively 
small  part  of  the  population  owning  property.  Privilege  and  occupation 
taxes  apply  only  to  those  exercising  the  privilege  or  following  the  par- 
ticular occupation  subject  to  the  law.  The  inheritance  tax  is  confined 
to  those  who  die  leaving  a  substantial  amount  of  property,  and  even  the 
poll  tax  is  limited  to  male  adults  of  certain  ages.  The  test  of  a  tax  is 
not  whether  it  reaches  the  entire  population  but  whether  it  applies  equally 
to  all  persons  similarly  situated.  The  income  tax  satisfies  this  requirement 
by  applying  the  same  rate  and  imposing  the  same  burden  upon  all  persons 
who  have  the  same  income.  The  fact  that  those  who  have  large  incomes 
pay  a  larger  tax  is  readily  justified  by  their  greater  ability  to  pay  and 
the  greater  sacrifice  involved  in  the  payment  of  a  tax  by  these  who  have 
small  incomes.  Moreover,  in  the  face  of  increasing  public  expenditure 
and  growing  demand  for  public  revenue,  it  is  not  apparent  why  those 
engaged  in  business  yielding  returns  should  not  make  corresponding  con- 
tributions to  the  support  of  government.  The  income  tax  is  the  only  one 
that  reaches  all  classes  of  excess  earnings. 

Objection  is  often  made  that  an  income  tax  law  is  inquisitorial,  but 
so  are  all  tax  laws  when  properly  administered.  Under  the  property  tax 
law  the  assessor  may  examine  the  taxpayer  and  call  his  neighbors  to 
testify  as  to  the  amount  and  value  of  his  property.  He  may  even  dis- 
regard the  taxpayer's  sworn  statement  and  increase  the  assessment  as 
justice  may  require.  According  to  a  recent  bulletin  of  the  Federal  Cen- 
sus Bureau,  the  cost  of  government  throughout  the  United  States  has 
practically  doubled  within  the  last  ten  years,  and  there  is  little  to  indi- 
cate that  the  maximum  has  yet  been  reached.  In  the  face  of  these 
mounting  public  burdens,  taxes  will  be  imposed  in  one  form  or  another, 
and  the  public  will  insist  upon  the  necessary  information  to  measure 
the  amount  chargeable  to  each  citizen.  Concealment  and  evasion  will  not 
permanently  prevail.  The  choice  lies  between  a  flexible  and  adjustable 
system  and  a  rigid  and  mechanical  one,  with  a  long  train  of  injustice 
in  its  wake. 

Congressman  Hull,  in  presenting  the  1913  income  tax  bill  to 
Congress,  stated  that: 

During  recent  years  there  has  been  a  general  agitation  and  demand 
in  almost  every  state  in  the  Union  and  in  almost  every  country  in  the 
world  for  intelligent,  fair  and  practical  reforms  and  readjustments  of 
their  tax  systems  to  the  end  that  every  citizen  may  be  required  to  con- 
tribute to  the  wants  of  the  government  in  proportion  to  the  revenue  he 
enjoys  under  its  protection.  To  this  end  the  doctrine  of  equality  of 
sacrifice  or  ability  to  pay  is  being  universally  invoked. 

We  believe  that  any  income  tax  adopted  by  Louisiana  should 
carry  liberal  exemptions.  A  citizen  should  be  first  permitted  to 
earn  enough  to  support  his  family  before  being  called  upon  to 


TAXATION  297 

contribute  to  the  government  under  an  income  tax.  In  Wiscon- 
sin the  exemption  is  $800  for  single  persons  and  $1,200  for  mar- 
ried persons.  In  Massachusetts,  which  has  a  classified  income 
tax,  there  is  an  exemption  of  $300  on  Classes  A  and  B,  represent- 
ing income  from  interest  or  dividends  from  certain  intangibles 
and  annuities,  providing  the  total  income  from  all  sources  does 
not  exceed  $600;  on  Class  C,  covering  profits  over  losses  arising 
from  the  sale  of  intangibles,  no  exemption  is  allowed;  but  on 
Class  D  there  is  an  exemption  of  $2,000  (with  possible  further 
exemption  not  exceeding  $1,000)  on  income  derived  from 
salaries,  business  and  professional  income.  The  New  York  in- 
come tax  exemptions  are  the  same  as  those  allowed  by  the 
Federal  Government,  viz.,  $1,000  for  a  single  person  and  $2,000 
for  a  married  person. 

This  theory  of  exemption  has  been  incorporated  in  every 
system  of  income  taxation,  and  is  supported  by  Professor  Adams, 
in  the  following  language : 

The  duty  of  the  financier  is  not  limited  to  the  getting  of  revenue, 
but  he  is  obliged  to  get  revenue  in  such  a  manner  that  the  source  from 
which  it  is  derived  shall  never  be  exhausted.  He  must  hold  in  mind  the 
needs  of  the  future  as  well  as  of  the  present,  and  is  therefore  debarred 
from  employing  the  taxing  power  in  such  a  manner  as  to  dry  up  the 
springs  of  present  revenue  or  to  hinder  the  development  of  an  enlarged 
supply. 

One  of  the  most  common  facts  in  connection  with  modern  systems 
of  taxation  is  the  exemption  of  incomes  and  property  below  a  certain 
amount,  and  many  financiers  justify  this  exemption  on  social  consider- 
ations. It  is  not  right,  they  say,  to  call  upon  a  citizen  to  contribute  to 
the  budget  of  the  state  until  the  necessary  domestic  budget  has  been 
provided  for.  Without  admitting  any  man's  right  to  live  in  the  modern 
state  without  contributing  to  its  support,  a  modified  application  of  this 
principle  may  be  defended  on  purely  fiscal  grounds.  The  surest  source 
of  public  wealth  is  a  lively  hope  and  a  healthy  expectation  on  the  part 
of  the  great  body  of  citizens,  and  in  so  far  as  exemption  of  low  incomes 
and  small  salaries  from  taxation  induces  to  the  conditions  from  which 
this  hope  springs,  such  exemptions  will  tend  to  the  expansion  of  a  na- 
tion's wealth.  If  this  be  true  the  exemption  of  small  incomes  from 
direct  taxation,  as  ;-.lso  of  the  property  of  those  who  relatively  are  poorly 
able  to  pay  for  the  support  of  the  state  must  ultimately  result  in  the 
development  of  a  source  of  wealth  from  which  the  state  may  expect  an 
increased  revenue. 

Senator  Ogden  L.  Mills,  a  prominent  lawyer  of  New  York, 
and  President  of  the  New  York  Tax  Association  in  an  address 
delivered  by  him  to  that  organization,  observed  that: 

The  income  tax  is  the  fairest  kind  of  tax,  because  it  taxes  every  man 
in  accordance  with  his  ability  to  pay.  Taxes  are  paid  out  of  income, 
and  the  income  which  a  man  enjoys  is  the  fairest  test  that  can  be  devised 
of  his  ability  to  contribute  his  share  to  the  cost  of  government.  A  man 
who  has  made  an  unfortunate  investment,  or  who  owns  a  new  business 
which  has  produced  and  made  no  return,  is  not  in  as  good  a  position 


298  SELECTED   ARTICLES 

to  pay  taxes  as  the  lawyer  or  professional  man  earning  a  large  income, 
and  yet  the  former,  under  a  property  tax,  is  obliged  to  contribute,  while 
the  latter  escapes  entirely.  The  income  tax  is  the  only  tax  that  will  reach 
the  professional  and  salaried  classes  who  enjoy  big  incomes  which  are 
today  tax  exempt. 

It  is  stated  in  the  report  of  the  Special  Commission  of  Ne- 
braska that: 

The  merits  of  the  income  tax  are  unquestioned.  Among  peoples  well 
advanced  industrially,  it  is  an  essential  aid  in  bringing  about  an  equitable 
apportionment  of  the  tax  burden,  (i)  As  a  test  of  ability,  it  is  a  fairer 
basis  than  the  value  of  property  upon  which  the  property  tax  rests,  for 
the  reasons  pointed  out  elsewhere,  that  all  kinds  of  property  are  not 
equally  productive  and  not  equally  indicative  of  the  ability  of  the  citizen 
to  pay  taxes.  (2)  In  the  second  place,  it  is  needed  to  reach  that  con- 
siderable class  of  persons  in  each  community  who  enjoy  an  income  out 
of  all  proportion  to  the  property  owned.  And  in  the  third  place,  it  is 
desirable  as  a  substitute  for  the  troublesome  personal  property  tax. 

Professor  Charles  J.  Bullock,  in  reply  to  a  direct  request  by 
the  Chairman  of  the  Manitoba  Commission,  expressed  the  fol- 
lowing opinion  with  respect  to  the  personal  income  tax : 

A  personal  income  tax  ought  to  be  adopted  in  your  Province  whenever 
public  opinion  is  ripe  for  it.  It  is  the  best  tax  which  you  can  levy  as  a 
supplement  to  your  tax  on  real  estate,  and  I  think  it  probable  that  in 
time  most  of  the  Canadian  provinces  and  American  states  will  come 
to  adopt  it.  Whether  the  time  has  yet  come  in  Manitoba,  I  am  not 
able  to  judge.  The  tax  ought  not  to  be  adopted  unless  the  people  are 
willing  to  favor  adequate  machinery  for  enforcing  the  tax,  and  are  ready 
to  accept  it  as  a  reasonable  method  in  determining  their  liability  for  the 
support  of  government.  The  operation  of  the  income  tax  depends  wholly 
upon  the  conditions  in  which  it  is  levied.  With  poor  administration,  ex- 
cessive rates,  and  a  hostile  public  opinion,  an  income  tax  becomes  a  mere 
tax  on  honesty,  while  under  opposite  conditions  it  can  be  enforced  with 
substantial  certainty  and  justice,  and  as  successfully  as  most  other  laws. 
Some  evasion  there  will  be,  necessarily,  but  it  is  possible  for  an  income 
tax  to  be  so  drafted  and  administered  as  to  command  public  favor  and 
reduce  the  amount  of  evasion  to  a  reasonable  minimum.  Wisconsin  has 
already  shown  that  with  proper  methods  of  administration,  a  reasonable 
income  tax  can  be  collected  with  substantial  certainty  and  completeness; 
and  against  Wisconsin's  evidence,  the  experiences  elsewhere  under  very 
opposite  conditions  count  for  little  or  nothing. 

And  Professor  Adams  of  Yale  University  said,  in  a  com- 
munication to  the  same  Commission,  that: 

The  literature  on  the  subject  of  the  personal  Income  Tax  is  now  so 
vast,  American  opinion  now  so  nearly  unanimous  and  the  results  of 
American  experience  so  nearly  conclusive — at  least  for  the  United  States — 
that  extended  discussion  seems  unnecessary.  The  state  of  provincial  in- 
come tax  is  now  a  demonstrated  success. 

The  Manitoba  Commission  recommended  the  adoption  of  a 
progressive  income  tax,  and  approved  an  exemption  of  $1,000  for 
unmarried  persons  and  $1,500  for  married  persons,  with  a  fur- 
ther exemption  for  each  child  or  dependent  of  $200.  The  Com- 
mission further  "recommended  that  the  administration  of  any 


TAXATION  29(j 

income  tax  law  that  may  be  enacted  be  wholly  administered  by 
the  Tax  Commission,  save  that  the  tax  collections  be  made  by 
the  local  authorities." 

The  members  of  our  Commission  think  that  a  differentiation 
should  be  made  between  earned  and  unearned  incomes.  This 
principle  has  long  been  recognized  in  Great  Britain,  and  the 
Royal  Commission  on  the  Income  Tax,  in  an  exhaustive  report 
submitted  to  Parliament  in  1920,  stated  that : 

Differentiation  is  the  term  used  to  express  the  discrimination  that  is 
made  for  Income  Tax  purposes  between  incomes  that  are  earned  by 
personal  exertion  and  incomes  that  are  not  so  earned.  We  are  satisfied 
that  some  such  discrimination  is  desirable  and  just.  Although  recognition 
of  the  principle  was  a  long  time  in  coming  the  demand  for  it  is  prac- 
tically as  old  as  the  tax  itself.  We  have  not  had  much  evidence  ad- 
vanced against  the  principle  of  differentiation,  and  we  are  convinced  that 
to  do  away  with  the  advantage  which  since  1907  has  been  granted  (within 
certain  limits)  to  incomes  earned  by  personal  exertion  would  be  a  dis- 
tinctly retrograde  step,  and  would  ignore  the  deeply-rooted  conviction 
which  undoubtedly  exists  in  the  public  mind  that  there  is  a  real  difference 
in  taxable  ability  between  the  two  classes  of  income  in  question. 

The  application  of  graduated  rates  is  so  well-nigh  universal 
that  it  is  hardly  a  debatable  question  in  the  majority  of  coun- 
tries and  states  that  have  adopted  the  income  tax.  The  Royal 
Commission  thus  tersely  stated  its  position  on  the  question  of 
"graduation" : 

We  do  not  feel  called  upon  to  defend  with  arguments  the  principle 
of  graduation  of  the  Income  Tax.  Direct  graduation  of  the  tax  was  bit- 
terly opposed  for  many  years,  but  it  is  now  almost  universally  admitted 
to  be  as  sound  in  principle  as  it  is  imperatively  necessary  in  practice. 
We  are  therefore  concerned  more  with  the  practical  than  with  the  the- 
oretical aspect  of  the  subject — not  so  much  with  the  principle  as  the  means 
by  which  that  principle  can  be  translated  into  practice. 


So  long  therefore  as  it  is  necessary  to  depend  on  the  Income  Tax  f9r 
a  great  part  of  the  revenue,  and  so  long  as  there  is  an  exempt  margin 
of  income,  an  abatement  appears  to  be  essential.  That  being  so,  we  have 
the  choice  (a)  of  giving  to  all  incomes  the  abatement  necessary  in  the 
case  of  smaller  ones,  and  of  effecting  further  graduation  by  other  means; 
or  (b)  of  complicating  the  system  by  diminishing  the  abatements  at  certain 
limits  of  income  and  finally  extinguishing  them  as  is  done  at  present. 

As  stated  elsewhere  in  this  report,  in  recommending  the 
adoption  of  an  income  tax,  we  contemplate  the  exemption  from 
taxation  of  certain  kinds  of  tangible  and  intangible  personal 
property,  among  which  may  be  mentioned :  Credits  of  all  kinds, 
such  as  open  accounts,  promissory  notes,  franchises,  the  capital 
stock  of  banks;  household  property,  diamonds  and  jewelry,  busi- 
ness furniture  and  fixtures,  and  agricultural  tools  and  imple- 
ments. 


300  SELECTED   ARTICLES 

Experience  has  taught  us  that  it  is  physically  impossible  to 
ever  place  all  of  this  class  of  property  on  the  assessment  roll, 
'regardless  of  how  stringent  or  efficient  the  administration  may 
be;  without,  of  course,  hiring  a  horde  of  tax  officials,  the  so- 
called  "ferret"  system  of  some  states,  in  which  case  the  cost 
of  assessing  and  collecting  the  tax  is  more  than  the  amount 
realized  in  taxes. 


INCOME  TAXES  1 

The  recent  adoption  of  effective  income  taxation  into  this 
country  affords  an  interesting  illustration  of  the  triumph  of  a 
sound  economic  idea  over  formidable  obstacles.  The  legal  bar- 
riers which  had  to  be  surmounted  have  already  been  mentioned, 
but  there  were  other  difficulties  to  overcome  equally  formidable. 
Income  taxes  had  been  on  the  statute  books  of  American  com- 
monwealths since  the  seventeenth  century,  and  had  been  con- 
sistently and  continuously  ineffective.  The  tax  was  generally  be- 
lieved to  be  too  intricate  and  too  inquisitorial  for  the  American 
people,  schooled  by  the  crudities  of  the  general  property  tax  to 
evasion  of  and  contempt  for  tax  law.  Expert  opinion  had  come 
to  hold  that  the  income  tax,  though  "sound  in  theory,"  made  too 
many  demands  upon  both  the  taxpayer  and  the  tax  administrator 
to  thrive  in  American  soil.  Yet  in  the  last  five  years  income 
taxes  of  the  European  type  have  been  put  into  successful  opera- 
tion by  both  state  and  Federal  governments  and  give  every 
promise  of  assuming,  in  the  future,  a  place  of  major  importance 
in  the  American  fiscal  system. 

The  mistake  of  the  experts  arose  rather  from  an  under- 
estimate of  the  strength  of  the  income  tax  than  from  an  under- 
estimate of  its  difficulties.  The  alleged  weaknesses  of  the  in- 
come tax  were  not  imaginary.  Experience  has  shown  that  it  is 
a  complex  and  difficult  tax  to  formulate  and  administer.  Just 
what  items  of  gross  income  should  be  included  and  what  losses, 
expenses,  and  other  deductions  allowed,  are  questions  which 
bristle  with  difficulties.  Some  forms  of  income  are  not  ex- 
pressed in  money  and  usually  escape  taxation ;  on  the  other  hand, 
it  is  almost  impossible  to  avoid  double  taxation,  particularly  in 
dealing  with  interest  and  dividends.  The  tax  has  also  the  diffi- 
culty of  being  a  class  tax:  the  federal  income  tax  touches 

1  Ely,  Richard  T.  et  al.     Outlines  of  Economics,     p.  720-3. 


TAXATION  301 

directly  less  than  I  per  cent  and  the  Wisconsin  income  tax 
less  than  3  per  cent  of  the  respective  populations  affected. 
The  tax  is  predominantly  a  city  tax  and  farmers  generally  es- 
cape; owing  to  the  facts  that  they  usually  do  not  keep  books 
and  that  much  of  their  income  does  not  find  expression  in  terms 
of  money;  although  it  must  be  admitted  that  relatively  few 
farmers  receive  incomes  above  the  exemption  limit.  Finally,  the 
mixture  of  "withholding  at  source"  and  direct  collection,  in  the 
Federal  tax,  imposes  large  and  unjust  expenses  of  collection 
upon  private  taxpayers,  complicates  the  administration  of  the 
tax,  and  in  some  cases  leaves  the  taxpayer  to  become  the  sole 
judge  of  the  taxibility  of  certain  items  of  income  and  of  the 
deductibility  of  certain  losses  and  expenses.1 

Despite  all  these  difficulties,  however,  the  income  tax  has 
succeeded.  It  is  reasonably  productive  and  will  become  more 
productive  as  time  passes :  the  federal  income  tax  in  1915  yielded 
a  revenue  of  over  $80,000,000,  and  in  1916  it  produced  over 
$100,000,000.  It  is  elastic,  and  can  be  made  more  productive  by 
simple  increase  of  rates.  Above  all  else,  it  realizes  with  reason- 
able success  "taxation  according  to  ability."  Property  taxes 
pay  little  attention  to  the  ability  of  the  owner  of  the  property. 
They  fall  upon  property  as  such  whether  it  is  free  or  encumbered 
by  debt ;  they  must  be  paid  by  the  unsuccessful  as  well  as  the 
successful ;  in  lean  years  as  well  as  fat  years.  The  income  tax, 
on  the  other  hand,  does  not  affect  the  very  poor  at  all;  it 
spares  the  unsuccessful  business,  the  new  business  in  its  develop- 
mental stage,  and  the  old  established  enterprise  in  times  of  busi- 
ness depression.  Its  appeal  is  thus  not  only  to  the  humanitarian 
sentiment  of  the  age,  but  to  the  common  sense  of  the  business 
man.  Except  when  collected  at  source  (when  it  acts  in  small 
part  like  an  excise)  it  is  subject  to  little  or  no  shifting.  And, 
unlike  the  property  tax,  it  grows  stronger  with  age  and  con- 
tinued use.  The  countries  which  have  tried  the  income  tax  keep 
it ;  and  in  the  last  quarter  of  the  century  practically  every  large 
country  in  the  world  which  did  not  already  have  the  income  tax 
has  introduced  it. 

The  mistake  of  the  critics  in  condeming  the  income  tax  for 
American  use  was  due  very  largely  to  a  misinterpretation  of  the 
failure  of  the  personal  property  tax.  That  tax  is  largely  evaded. 

1 A  criticism  of  the  federal  income  tax  by  a  disinterested  and  com- 
petent committee  of  the  National  Tax  Association  will  be  found  in  the 
Proceedings  of  that  association,  v.  ix. 


302  SELECTED   ARTICLES 

The  critics  inferred  from  this  that  American  taxpayers  are  liars 
and  would  similarly  evade  an  income  tax.  Experience  with  the 
income  tax  has  shown,  however,  that  the  average  American  tax- 
payer is  honest  and  will  make  an  honest  declaration  if  the  tax 
be  equitable  and  tax  officials  at  the  same  time  firm,  competent, 
and  considerate.  The  personal  property  tax  in  this  country  has 
failed,  not  because  the  taxpayer  is  dishonest,  but  because  the 
tax  is  at  times  barbarously  severe  in  burden,  strikingly  un- 
equal in  operation,  and  administered  by  officials  who  are  fre- 
quently incompetent  and  out  of  sympathy  with  the  tax  itself. 
Moreover,  the  income  tax  is  no  more  complicated  than  any 
other  direct  tax  involving  valuation  and  assessment.  It  ap- 
pears to  be  more  complicated  than  the  property  tax  merely 
because  in  drafting  income  tax  laws  it  is  customary  to  anticipate 
all  problems  of  detail  and  define  the  proper  answer  in  the 
statute  itself;  whereas,  in  property  tax  laws  almost  all  the  diffi- 
cult questions  are  avoided  by  laying  the  tax  on  the  "fair  cash" 
or  "market  value"  and  leaving  the  meaning  of  this  term  to 
be  decided  by  the  judgment  of  the  assessor.  In  the  average 
case,  it  is  easier  to  determine  a  man's  income  with  reasonable 
accuracy  than  it  is  to  determine  with  the  same  degree  of  accu- 
racy what  his  property  is  worth. 

Absentee  ownership  increases  with  industrial  development, 
and  much  income  is  now  derived  from  particular  jurisdictions 
by  persons  who  reside  elsewhere.  This  leads,  in  practice,  to 
double  taxation,  as  both  the  jurisdiction  in  which  the  recipient 
lives  and  that  in  which  the  income  originates  are  likely  to  im- 
pose the  tax.  Such  double  taxation  is  reduced  as  the  jurisdic- 
tion is  enlarged  to  which  the  income  tax  applies ;  and  for  this 
reason  many  authorities  advocate  the  exclusive  employment  of 
the  income  tax  by  the  Federal  Government.  If  the  income  tax 
cannot  be  employed  by  both  state  and  Federal  governments, 
this  conclusion  is  warranted.  But  we  see  no  reason  why  the 
states  should  renounce  the  income  tax  and  use  substitutes  which 
are  manifestly  inferior,  merely  because  the  Federal  government 
is  employing  the  same  tax.  Nearly  all  taxes  must  be  paid  out 
of  income.  The  specific  tax  employed  is  merely  a  device  for 
distributing  the  tax.  Why,  then,  should  the  state  employ  a  poor 
method  of  distribution,  such  as  that  embodied  in  the  personal 
property  tax,  when  it  might  employ  a  tax  which  with  substan- 
tial accuracy  lays  the  burden  in  accordance  with  ability  to  pay? 
As  a  matter  of  fact,  the  federal  income  tax  is  likely  to  encourage 


TAXATION  303 

the  adoption  of  state  income  taxes,  because  the  federal  tax 
familiarizes  the  people  with  income  tax  products,  and  with 
simple  modifications  a  report  prepared  for  the  federal  govern- 
ment can  be  used  for  the  state  government.  We  should  have, 
not  hostility  between  state  and  federal  administrations,  but 
joint  and  cooperative  use  of  many  forms  of  taxation. 

BRIEF  EXCERPTS 

The  operation  of  the  general  property  tax  has  come  to  be 
recognized  as  a  grotesque  and  lamentable  failure.  William  L. 
Garrison,  Jr.  Survey.  35  ;  475.  Ja.  22,  '  16. 

The  State  or  Provincial  income  tax  is  now  a  demonstrated 
success.  Thomas  S.  Adams.  Report  of  the  Louisiana  Assess- 
ment and  Taxation  Commission  to  the  Constitutional  Convention. 
1921.  p.  45. 

We  believe  that  the  time  has  come  to  enter  upon  a  more 
scientific  method  of  raising  revenues  for  state  and  locality  and 
for  the  relief  of  real  estate.  In  this  connection,  the  Commission 
recommends  the  enactment  of  a  general  personal  income  tax  at 
a  low  rate,  which  will  be  a  tax  on  income  after  it  is  received 
by  the  taxpayer  based  upon  the  taxable  ability  of  the  recipient 
of  such  income.  Annual  Report  of  the  New  York  State  Tax 
Commission  for  1918.  p.  68-9. 

The  income  tax  is  fiscally  adequate.  Under  proper  conditions 
it  will  produce  probably  more  revenue  for  the  state  as  a  whole 
than  it  is  possible  to  obtain  from  intangibles  under  the  general 
property  tax.  We  may  therefore  confidently  expect  to  add  to 
the  state  and  local  revenues  by  introducing  such  a  tax.  The 
necessary  condition  is  the  adoption  of  such  a  system  of  property 
taxation  as  will  permit  the  exemption  of  intangibles  and  the 
use  of  a  properly  graduated  tax  on  incomes.  Harley  L.  Luts. 
Report  of  the  Special  Joint  Taxation  Committee  of  the  8$d  Ohio 
General  Assembly.  1919.  p.  124. 

Another  common  objection  is  that  the  existence  of  an  income 
tax  in  a  given  state  operates  as  a  handicap  to  business  and  an 
additional  burden  on  its  citizens  in  competition  with  rivals  in 
states  where  no  such  tax  exists.  But  this  objection  does  not 


304  SELECTED   ARTICLES 

stand  the  test  of  analysis  on  either  theoretical  or  practical 
grounds.  The  people  of  every  community  must  raise  whatever 
revenue  is  required  to  maintain  their  own  government.  Whether 
they  use  one  or  many  methods  of  taxation  for  that  purpose  is 
wholly  immaterial.  Report  of  the  Wisconsin  Tax  Commission. 
1920.  p.  52. 

The  merits  of  the  income  tax  are  unquestioned.  Among 
peoples  well  advanced  industrially  it  is  an  essential  aid  in 
bringing  about  an  equitable  apportionment  of  the  tax  burden, 
(i)  As  a  test  of  ability  it  is  a  fairer  basis  than  the  value  of 
property  upon  which  the  property  tax  rests  for  the  reasons 
pointed  out  elsewhere  that  all  kinds  of  property  are  not  equallv 
productive  and  not  equally  indicative  of  the  ability  of  the  citizen 
to  pay  taxes.  (2)  In  the  second  place  it  is  needed  to  reach  that 
considerable  class  of  persons  in  each  community  who  enjoy  an 
income  out  of  all  proportion  to  the  property  owned.  And  in 
the  third  place  it  is  desirable  as  a  substitute  for  the  trouble- 
some personal  property  tax.  Report  of  the  Nebraska  Special 
Commission  on  Revenue  and  Taxation.  1921.  p.  171. 

Recognizing,  as  we  do,  that  an  income  tax  is  perhaps  the 
fairest  and  most  equitable  method  of  raising  revenue,  particularly 
from  those  classes  of  property  which  are  the  most  difficult  to 
assess,  we  are  pleased  to  note  that  Congress  has  enacted  a  law 
which  gives  those  states  having  an  income  tax  law,  upon  the 
request  of  the  Governor  of  the  state,  access  to  the  data  upon 
which  the  federal  income  tax  is  now  assessed,  so  far  as  it 
affects  corporations,  and  we  hope  that  a  similar  provision  will 
soon  be  made  in  that  affecting  the  income  of  individuals.  The 
only  reasonable  objections  to  taxation  by  this  method  being  the 
difficulty  and  expense  attending  its  administration,  and  both  of 
these  having  been  almost  entirely  eliminated  by  the  granting 
of  the  privilege  mentioned  above,  we  recommend  that  Georgia 
get  in  line  by  enacting,  as  soon  as  the  constitutional  amendment 
herein  provided  for  will  permit,  a  law  providing  for  taxation  on 
an  income  basis,  and  at  a  very  low  rate.  Report  of  the  Special 
Tax  Commission  for  Georgia.  1919.  p.  43. 

The  conclusions  of  the  Committee  with  respect  to  the  income 
tax  law,  as  a  possible  method  of  relief  from  the  evils  of  the 
general  property  tax  are: 


TAXATION  305 

(i)  That  the  basic  principle  of  the  personal  income  tax  is 
sound  and  that  the  income  tax  is  an  essential  part  of  any  well- 
balanced  system  of  state  taxation;  (2)  that  its  place  in  the 
system  of  taxation  for  South  Carolina  is  as  a  supplement  to  a 
properly  classified  property  tax;  (3)  that  it  should  be  used  as 
one  of  the  principal  sources  of  state  revenues,  so  as  to  leave  the 
taxation  of  property  largely  to  counties  and  the  other  local  tax- 
ing districts ;  (4)  that  the  constitutional  provisions  requiring 
taxation  of  all  property  at  a  uniform  rate  affect  the  application 
of  a  general  income  tax  law  to  an  extent  that  makes  it  inexpedient 
to  enact  and  to  attempt  to  administer  the  income  tax  as  a  part 
of  the  state's  system  of  taxation  at  this  time.  Report  of  Joint 
Special  Committee  on  Revenue  and  Taxation.  South  Carolina. 
1921.  p.  97. 

It  has  been  and  will  be  said  that  while  an  income  tax  may 
be  all  right  for  national  purposes,  it  is  unsuited  to  and  impractic- 
able for  individual  states.  Modern  commerce  pays  little  heed  to 
state  boundaries,  and  most  commercial  concerns  of  any  magnitude 
conduct  business  in  more  than  one  state.  The  difficulty  of  allo- 
cating this  income  to  the  state  of  its  origin  is  a  real  one,  and 
may  be  flatly  acknowledged.  It  is  not  insuperable,  however, 
nor  is  it  confined  to  income  taxation  alone.  The  same  problem 
arises  in  the  administration  of  inheritance  tax  laws  and  in  the 
assessment  of  interstate  railroads  and  other  public  utilities 
under  the  general  property  tax.  It  also  arises  in  the  regulation 
of  public  service  companies  where  national  and  state  jurisdic- 
tions conflict,  and  in  administration  of  pure  food  laws  and  other 
exercises  of  the  police  power.  Although  difficult  the  problem 
has  been  met  in  these  fields.  Recent  decisions  of  the  United 
States  Supreme  Court  on  assessments  made  under  state  income 
tax  laws  go  far  to  remove  this  objection,  and  indicate  that  the 
principles  already  established  in  dealing  with  interstate  problems 
under  the  property  tax,  rate  regulation  and  pure  food  laws  will 
be  applied  to  the  taxation  of  incomes.  Report  of  the  Wisconsin 
Tax  Commission.  1920.  p.  52. 


NEGATIVE  DISCUSSION 

TAXATION  OF  INCOMES  1 

In  theory  an  income  tax  is  an  ideal  one.  Much  property  is 
necessarily  carried  by  citizens  of  a  state  that  is  unproductive, 
and  hence  yields  but  little  income  out  of  which  taxes  may  be 
paid;  while,  on  the  other  hand,  if  the  state  only  demands  a  part 
of  the  income  actually  earned,  it  works  no  hardship  on  its 
citizens.  If  each  man  paid  taxes  according  to  his  income,  those 
who  have  most  would  pay  most,  and  those  who  have  least  would 
pay  least. 

But  theory  and  practice  do  not  always  harmonize.  It  is  not 
difficult  to  devise  an  ideal  system  of  taxation  theoretically,  but, 
unfortunately,  theory  often  fails  in  its  practical  application. 
While  it  is  true  that  a  majority  of  students  of  political  economy 
advocate  the  income  tax  as  an  ideal  system  of  taxation,  it  is 
also  true  that  its  practical  application  to  the  social  and  indus- 
trial condition  of  the  American  people  has  thus  far  been  a 
failure. 

The  taxation  of  incomes  as  a  source  of  state  revenue  is  not  a 
new  theory  in  state  finance.  It  has  been  tried  in  many  of  the 
American  states,  and  the  system  still  obtains  in  several  of  our 
commonwealths.  Many  European  countries  have  been  trying  to 
solve  the  problem  of  the  successful  taxation  of  incomes,  and 
while  it  is  not  contended  that  they  have  succeeded,  yet  some 
notable  advances  have  been  made  in  that  direction.  As  no 
investigation  of  this  subject  would  be  complete  without  a  study 
of  its  history  in  other  countries,  a  brief  review  of  the  income  tax 
in  some  of  the  European  countries  will  be  included  in  this 
chapter. 

The  Income  Tax  in  the  United  States 

The  history  of  the  income  tax  in  the  United  States  covers  a 
period  of  nearly  two  hundred  seventy-five  years.  As  early  as 

1  Second  biennial  report  of  the  Minnesota  Tax  Commission.  1910. 
p.  156-69. 


308  SELECTED   ARTICLES 

1634,  the  colony  of  Massachusetts  Bay  provided  for  a  "faculty 
tax,"  which  was  in  principle  the  same  as  an  income  tax.  Other 
colonies  followed  the  example  of  Massachusetts.  The  earlier 
history  of  the  tax  in  the  colonies  was  characterized  by  indif- 
ferent and  unsatisfactory  methods  both  as  to  determining  the 
income  of  the  individual  and  the  collection  of  the  tax.  As  a 
consequence,  the  laws  were  frequently  changed,  but  with  little 
apparent  improvement. 

We  are  not  concerned,  however,  with  a  study  of  the  income 
tax  in  colonial  days,  and  but  little  interested  in  its  earlier  history 
in  some  of  the  states  of  the  Union.  The  social  and  industrial 
conditions  of  the  country  have  undergone  such  great  changes 
in  the  past  four  or  five  decades  that  a  system  of  taxation  fairly 
suited  to  the  conditions  existing  forty  or  fifty  years  ago  might 
be  entirely  unsuited  to  present  conditions.  Conclusions,  favor- 
able or  otherwise  to  an  income  tax,  based  on  the  experience  of 
American  colonies  and  states  in  our  earlier  history  would  be  of 
doubtful  value  at  this  time  because  of  changed  conditions.  We 
shall,  therefore,  confine  our  study  of  the  question  to  the  several 
states  that  have  attempted  to  impose  such  a  tax  in  recent  years. 

Of  the  forty-six  states  of  the  Union,  seventeen  have  made 
provision  for  an  income  tax,  either  in  general  or  special  form, 
while  several  of  the  other  states  endeavored  to  enact  such  a 
law,  but  without  success.  Some  thirteen  or  fourteen  tax  com- 
missions have  treated  the  subject  in  their  reports  with  varying 
conclusions.  We  are,  therefore,  fortunately  not  confined  to  a 
study  of  the  theoretical  side  of  the  question  only,  but  can  refer 
to  the  actual  experience  of  several  states  in  their  efforts  to 
raise  a  part  of  the  public  revenue  by  means  of  an  income  tax. 

The  Income  Tax  in  Massachusetts,  Virginia,  North 
Carolina  and  Louisiana 

Mr.  Delos  O.  Kinsman,  in  the  Quarterly  Journal  of  Econom- 
ics for  February,  1909,  thus  summarizes  the  experience  of  four 
states  in  recent  years  with  the  income  tax : 

There  have  been  three  periods  of  income  tax  activity  in  the  United 
States:  the  first  from  1840  to  1850;  the  second  from  1860  to  1870;  and 
the  third,  or  present  period  of  activity,  which  began  about  1895.  The 
keen  interest  in  the  subject  during  recent  years  is  evidenced  by  the  fact 
that  since  1895  sixteen  states  and  three  territories  have  paid  attention  to 
the  tax  either  by  constitutional  amendment,  legislative  enactment,  or  in 
commission  reports. 

The  four  states  employing  the  tax  at  the  beginning  of  this  period — 
Massachusetts,  Virginia,  North  Carolina,  and  Louisiana — have  been  little 


TAXATION  309 

affected  by  the  present  movement.  The  law  in  Massachusetts,  as  it  has 
stood  since  1873,  provides  that  "income  from  any  profession,  trade  or 
employment  shall  not  be  construed  to  be  personal  estate  for  the  purpose 
of  taxation  except  such  portion  as  exceeds  the  sum  of  $2,000  per  annum, 
provided,  however,  that  no  income  shall  be  taxed  which  is  derived  from 
any  property  or  estate  which  is  the  subject  of  taxation."  This  act,  which 
was  the  result  of  compromise,  has  yielded  little  revenue  to  the  state.  In- 
deed, it  has  been  asserted  by  the  tax  commissioner  that  the  "machinery 
of  the  Massachusetts  tax  laws  is  not  adapted  to  the  enforcement  of  an 
income  tax,  and  until  it  is,  the  income  tax  can  never  attain  a  prominent 
place  in  our  system."  And  this  statement  was  made  after  the  appoint- 
ment of  a  deputy  tax  commissioner  whose  duty  it  is  to  visit  each  city 
and  town  in  the  state  for  the  purpose  of  obtaining  greater  uniformity  in 
taxation. 

Virginia,  likewise,  has  apparently  been  uninfluenced  by  the  present 
activity.  While  she  has  the  somewhat  unique  practice  of  frequently  re- 
enacting  her  revenue  laws,  she  has,  for  more  than  a  generation,  made  little 
change  in  her  income  tax.  For  some  time  all  forms  of  income — rents, 
wages,  interests,  and  profits — have  been  taxed.  Besides  certain  specified 
deductions  a  general  exemption  ranging  from  $600  to  $i,opo  has  been 
allowed.  The  present  law,  enacted  in  January,  1908,  provides  for  the 
taxation  of  "the  aggregate  amount  of  income  in  excess  of  $1,000,  whether 
received,  or  due  but  not  received,  within  the  year  next  preceding  the 
first  of  February  in  each  year."  The  law  then  proceeds  to  enumerate  in 
detail  the  sources  of  rent,  interest,  salaries,  and  profits  upon  which  the 
rate  may  be  levied.  It  further  declares  that  in  addition  to  the  exemption 
of  $1,000  any  person  may  also  deduct  all  losses  sustained  during  the  year. 
The  administration  of  the  law  rests  with  the  local  authorities,  the  income 
being  assessed  by  the  local  assessor  and  the  tax  gathered  by  the  local  tax 
collector. 

The  revenue  derived  from  the  tax  has  been  slowly  increasing  in  amount. 
In  1900  it  amounted  to  $46,023,  in  1901  to  $58,254,  in  1902  to  $62,221,  in 
1904  to  $71,225,  and  in  1906  to  $94,367.  While  this  gradual  increase  in 
the  receipts  from  the  tax  is  encouraging,  and  the  total  amount  is  con- 
siderable  when  compared  with  that  received  in  other  states  from  the  same 
source,  the  amount  is  still  unimportant  when  compared  with  the  total  tax 
of  the  state. 

The  state  of  North  Carolina  has  had  a  continuous  experience  with  the 
tax  since  1849.  Although  the  law  was  always  simple  in  form,  it  reached 
wages,  interest,  and  profits,  and,  during  a  portion  of  the  time,  rent.  In 
1893  the  present  movement  was  initiated  by  the  enactment  of  a  new  law, 
containing  more  specific  provisions  and  introducing  a  progressive  rate. 
This  progressive  rate  upon  income  from  sources  other  than  taxable  prop- 
erty was  doubled  in  1895,  and,  as  thus  changed,  continued  in  force  until 
1901.  In  the  latter  year  the  law  abolished  the  progressive  rate  and  sub- 
stituted a  proportional  rate  of  10  per  cent  upon  all  incomes  in  excess  of 
$1,000  except  such  as  were  derived  from  property  already  taxed.  In  reply 
to  a  series  of  written  questions  the  taxpayer  was  required  to  list,  in 
itemized  form,  his  gross  income  from  all  sources  except  property  taxed. 
The  assessor  was  made  subject  to  a  penalty  of  $5  for  each  question  un- 
answered, the  county  commissioners  being  empowered  to  collect  the  fine. 
Or  any  individual  might  bring  suit  against  the  assessor  and  receive  one- 
half  the  amount  collected  for  his  pains.  No  local  unit — city,  township, 
or  county — was  permitted  to  levy  the  tax  while  the  state  law  was  in 
operation. 

The  law  of  1905  materially  changed  the  law  of  1901.  The  taxpayer 
was  required  simply  to  declare  under  oath  the  amount  of  his  gross  income 
in  excess  of  $1,000  from  "salaries,  fees,  trade,  profession,  and  property 
not  taxed."  It  was  made  unlawful  to  publish  the  income  tax  list  or  any 
part  of  it,  the  penalty  for  such  offense  being  not  more  than  $50  or  thirty 
days'  imprisonment.  But  the  assessor  might  report  to  the  corporation 
commissioner  those  listed  for  the  income  and  those  he  thought  should 
be  listed,  and  the  corporation  commissioner  was  permitted  to  take  such 
steps  as  he  deemed  necessary  to  secure  the  assessment  and  collection  of 


310  SELECTED   ARTICLES 

such  taxes.  The  law  of  1905  was  reenacted  in  1907  and  is  in  force  at 
the  present  time. 

The  state  of  North  Carolina  shows  an  increase  of  revenue  from  her 
income  tax  during  the  present  period.  The  law  of  1895  yielded  in  the 
following  year  $3,460,  while  the  total  state  tax  was  $604,542.  In  this 
year,  1896,  of  the  ninety-six  counties,  thirty-nine  returned  the  tax.  Three 
years  later,  in  1899,  the  income  tax  revenue  had  slowly  advanced  to 
$4,399,  while  the  state  tax  had  increased  to  $723,307,  and  fifty-eight  of 
the  ninety-six  counties  now  returned  incomes. 

The  appointment  of  a  state  tax  commission  about  1900  was  in  harmony 
with  the  new  movement.  By  issuing  a  pamphlet  of  instructions  to  the 
assessors,  explaining  the  law,  and  by  carefully  supervising  the  assessments, 
this  commission  added,  in  round  numbers,  $41,000,000  to  the  assessment 
rolls  in  1901.  It  increased  the  revenue  from  the  income  tax  from  $5,014 
in  1900  to  $19,030  in  1901.  In  that  year  eighty-one  of  the  ninety-seven 
counties  reported  the  tax.  The  receipts  from  it  steadily  advanced  after 
1901,  until  in  1907  when  they  amounted  to  $35,958.  The  total  state  tax 
during  the  same  period  increased  about  $100,000. 

The  tax  commission  in  its  report  of  1902  said,  in  regard  to  the  income 
tax,  "there  may  be  some  difficulty  in  working  out  at  first  satisfactory  de- 
tails for  the  assessment  and  collection  of  the  tax,  but  it  can  be  done." 
Although  their  report  of  1904  contains  a  number  of  recommendations  for 
the  improvement  of  the  revenue  laws,  no  suggestions  are  found  regarding 
the  income  tax.  Indeed,  the  state  auditor  says  of  the  present  law,  "This  is 
about  the  best  law,  I  think,  we  can  have  in  the  state  and  keep  within  the 
bounds  of  constitutional  limitations."  He  further  says,  "The  law  of 
course  is  in  its  infancy,  and  will  work  better  as  the  years  go  by,  and  the 
increase  will  be  correspondingly  greater,  I  think,  in  the  years  to  come." 
The  present  clerk  of  the  corporation  commission  says:  "The  law  is  prov- 
ing satisfactory  as  far  it  goes.  A  great  many  are  of  the  opinion  that  it 
should  reach  incomes  from  all  sources;  however,  this  is  a  question  in 
which  there  is  a  difference  of  opinion." 

Louisiana  is  the  one  state  that  has  discontinued  the  taxation  of  in- 
comes during  the  present  period  of  activity.  She  first  levied  a  tax  upon 
incomes  in  1865.  Though  it  continued  until  about  1900,  the  law  was 
never  generally  enforced.  The  receipts  of  the  tax  slowly  advanced  from 
$2,476  in  1868  to  nearly  $25,000  in  1880,  but  soon  began  to  decline.  In 
1899,  when  but  two  of  the  fifty-nine  counties  in  the  state  reported  incomes 
at  all,  the  total  receipts  amounted  to  only  $104.  The  report  since  1900 
makes  no  mention  of  the  tax  whatever. 

The  Income  Tax  in  South  Carolina  and  Oklahoma 

South  Carolina  experimented  with  the  income  tax  from  1701 
to  1868,  when  it  was  discontinued.  It  was  revived  again  in  1897, 
and  is  still  in  force.  The  law  provides  that  there  shall  be  levied 
upon  "the  gains,  gross  profits,  and  income"*  annually  received  by 
any  citizen  of  the  state  from  any  source,  "a  tax  of  i  per  cent 
on  the  amount  so  derived  over  and  above  $2,500  and  up  to  $5,000 ; 
il/3  per  cent  on  $5,000  and  over  up  to  $7,500;  2  per  cent  on  $7,500 
and  over  up  to  $15,000,  and  3  per  cent  on  $15,000  and  over."  In 
addition  to  the  general  exemption  of  $2,500,  the  law  exempts  in- 
terest on  United  States  bonds  and  state  bonds,  and  also  permits 
the  deduction  of  necessary  expenses  actually  incurred  in  carry- 
ing on  the  business,  occupation  or  profession. 

It  is  made  unlawful  for  any  officer  to  disclose  or  allow  to  be 


TAXATION  311 

made  known  in  any  way  the  amount  or  source  of  income,  profit 
or  expenditure  returned  by  any  person.  The  amount  of  the  tax 
to  be  raised  is  apportioned  by  the  legislature  among  the  counties 
of  the  state,  and  is  levied  and  collected  in  the  same  manner  as 
other  taxes. 

So  far,  the  income  tax  in  South  Carolina  has  not  given  gen- 
eral satisfaction,  and  several  attempts  have  been  made  to  repeal 
it,, but  without  success.  In  the  first  year  of  its  operation,  1898, 
the  tax  amounted  to  $6,800,  but  four  years  later,  in  1902,  it 
yielded  less  than  $300.  In  the  following  three  years  the  receipts 
from  the  income  tax  gradually  increased,  the  amount  collected 
in  1903  being  $1,476;  in  1904,  $1,281;  and  in  1005,  $2,130.  It 
reached  the  maximum  in  1906,  the  amount  collected  in  that  year 
being  $12,201.  The  receipts  for  1907  were  $10,687,  and  for  1908 
$8,554.  The  total  receipts  from  this  source  for  eleven  years, 
1898  to  1908  inclusive,  amounted  to  only  $49,929. 

In  his  report  for  the  fiscal  year  1908,  the  controller-general 
of  South  Carolina  says : 

The  law  has  never  been  generally  enforced.  A  determined  effort  was 
made  by  this  office  through  instructions  to  county  auditors  in  1906, — that 
being  the  re-assessment  year  for  real  estate — to  exert  great  diligence  in 
enforcing  it,  but  the  results  have  been  far  from  satisfactory.  As  stated 
in  my  report  for  1907,  it  is  evident  that  only  a  small  part  of  conscientious 
people  are  paying  this  tax,  and  others  who  are  liable,  and  in  all  prob- 
ability better  able  to  pay,  are  escaping  and  evading  its  payment.  Were 
the  law  strictly  and  generally  enforced  in  the  state,  it  would,  in  my 
opinion,  secure  a  revenue  of  at  least  $50,000  from  this  source.  Unless 
some  means  are  devised  to  secure  its  general  enforcement,  it  had  best 
be  repealed. 

The  new  state  of  Oklahoma  provided  for  an  income  tax  by 
legislative  enactment  in  1908.  The  law  taxes  "gross  income 
from  salaries,  fees,  trade,  profession,  and  property  upon  which 
gross  receipt  or  excise  tax  has  not  heen  paid,  in  excess  of 
$3,500."  The  rate  is  ^2  of  I  per  cent  on  amounts  in  excess  of 
$3,500  and  less  than  $5,000;  34  of  i  per  cent  between  $5,000  and 
$10,000;  1.2  per  cent  between  $10,000  and  $20,000;  i%  per  cent 
between  $20,000  and  $50,000;  2  per  cent  between  $50,000  and 
$100,000,  and  3T/3  per  cent  on  amounts  in  excess  of  $100,000. 

It  is  made  unlawful  to  print  any  part  of  the  income  tax  re- 
turns unless  the  tax  upon  the  income  becomes  delinquent.  An 
attempt  is  made  to  secure  a  better  administration  of  the  law  by 
requiring  the  assessor  to  send  to  the  state  auditor  not  only  the 
names  of  those  who  declare  that  they  have  incomes  in  excess  of 


312  SELECTED   ARTICLES 

$3,500,  but  also  those  who,  in  his  opinion,  have  incomes  in  ex- 
cess of  that  amount  but  have  failed  to  make  a-  return,  as  well 
as  those  who,  in  his  opinion,  have  returned  an  amount  less  than 
their  actual  income.  The  state  auditor  is  authorized  to  take  such 
steps  as  he  may  deem  necessary  to  compel  any  person  whose  in- 
come is  questioned  to  make  a  correct  return.  The  amount  of 
the  tax  due  upon  the  income  is  certified  to  the  county  clerk  of 
the  county  in  which  the  income  receiver  resides,  and  collection  is 
made  by  the  county  treasurer  in  the  same  manner  as  other  taxes 
are  collected. 

Proportion  of  Income  Taxpayers  to  Population 

It  is  interesting  to  note  the  proportions  of  income  taxpayers 
to  population  in  these  countries  having  an  income  tax.  In  seven- 
teen states  in  Europe  and  Australia  the  average  is  about  10  per 
cent.  In  Saxony  one  out  of  four,  in  Prussia  one  out  of  six,  and 
in  England  about  one  out  of  thirty-seven  of  the  population  pays 
an  income  tax.  The  difference  in  percentage  of  income  taxpay- 
ers to  population  is  due  largely  to  the  difference  in  exemptions. 

In  Prussia,  for  instance,  where  the  exemption  is  $214,  nearly 
90  per  cent  of  the  income  taxpayers  were  assessed  in  1909  on  in- 
comes of  less  than  $715,  and  only  about  3  per  cent  on  incomes 
in  excess  of  $1,550.  Had  the  exemption  been  $1,000,  only  about 
one  in  each  one  hundred  fifty  of  population  would  have  been 
assessed  on  incomes.  In  Austria  85  per  cent  of  income  taxpayers 
are  assessed  on  incomes  of  less  than  $815,  while  about  3  per  cent 
have  incomes  in  excess  of  $2,500.  During  the  four  years  of  the 
Civil  War  income  tax  in  this  country,  1867-1870,  only  about  one 
out  of  each  one  hundred  fifty  of  population  paid  an  income  tax. 

Income   Taxation  More  Successful  in  Europe  than 
United  States 

A  study  of  the  income  tax  in  European  countries  leads  to  the 
conclusion  that  both  in  operation  and  revenue  it  has  been  much 
more  successful  than  in  the  United  States.  This  is  due,  in  part 
at  least,  to  the  difference  in  the  industrial,  commercial  and  po- 
litical conditions  of  the  people  of  Europe  as  compared  with  the 
United  States,  and  partly  to  the  fact  that  the  principle  of  taxa- 
tion at  the  source  of  the  income  rather  than  that  of  self-assess- 


TAXATION  313 

ment  has  been  followed  in  those  countries  of  Europe  that  have 
had  the  most  successful  experience  with  the  income  tax. 

The  Theory  of  an  Income  Tax 

The  basic  theory  upon  which  all  proposals  for  an  income  tax 
are  made  is  that  individuals  should  contribute  to  the  cost  of 
government  in  proportion  to  their  ability,  and  that  income  is  the 
most  just  measure  of  that  ability.  That  the  income  tax  is  an 
admirable  one  in  theory  is  generally  conceded.  Indeed,  through- 
out its  history  in  the  states  it  has  never  been  seriously  attacked 
from  a  theoretical  point  of  view.  Failure  has  generally  been 
attributed  to  the  inapplicability  of  the  principle  rather  than  to 
the  principle  itself.  Nevertheless,  sentiment  in  favor  of  an  in- 
come tax  is  rapidly  growing.  It  is  felt  that  we  have  reached  a 
point  in  our  industrial  development  that  demands  some  system 
of  taxation  that  will  distribute  the  burdens  of  government  more 
equitably  than  the  general  property  tax  is  now  doing.  Every 
state  has  a  large  class  of  wealthy  citizens  who,  in  proportion  to 
their  wealth  and  to  the  benefits  of  government  received  by  them, 
contribute  but  little  to  the  public  burden. 

If  swollen  fortunes  could  be  reached  by  an  income  tax,  ac- 
cumulated wealth  would  be  made  to  bear  a  much  larger  share 
of  the  burden  of  taxation  than  it  is  now  doing,  thus  relieving 
the  less  wealthy  and  wage-earning  classes  from  a  part  of  the 
unequal  share  they  are  now  bearing. 

Self -Assessment  Not  a  Success 

But  however  desirable  an  income  tax  may  be  in  theory,  an 
investigation  of  its  history  in  those  states  that  have  experi- 
mented with  it  in  practice  demonstrates  that  the  system  followed 
in  this  country,  that  of  self -assessment,  has  not  only  failed  to 
equalize  the  burdens  of  taxation,  but  has  been  equally  unsuccess- 
ful in  producing  any  satisfactory  amount  of  state  revenue. 
While  some  of  the  advocates  of  the  tax  claim  that  its  failure  is 
due  to  the  indifference  and  carelessness  of  public  officials  in  en- 
forcing the  law,  others  contend  that  the  principle  is  incapable  of 
practical  application  to  the  social  and  industrial  conditions  of 
the  American  people. 

Mr.  Delos  O.  Kinsman,  who  has  made  a  very  exhaustive  study 
of   income  taxation  in  the  United   States,   and   from  whom  we 


314  SELECTED  ARTICLES 

have  already  quoted  in  an  earlier  part  of  this  chapter,  thus  sum- 
marizes his  conclusions  in  his  monograph  entitled,  The  Income 
Tax  in  the  Commonwealths  of  the  United  States : 

The  administration  of  the  law  has  been  much  the  same  in  all  the 
states.  It  has  been  assessed,  as  a  rule,  by  the  local  assessors  and  col- 
lected by  the  local  tax  collectors.  The  laws  have  required  that  the  tax 
should  be  levied  by  self-assessment,  almost  invariably  under  severe  pen- 
alties for  failure  to  comply  .  .  .  The  attitude  of  the  state  courts 
toward  the  income  tax  has  been  one  of  sympathy.  In  the  few  cases 
upon  the  subject  brought  before  them  they  have  upheld  the  tax.  Had 
all  forces  been  as  active  in  support  of  the  system  as  the  state  courts,  the 
tax  would  undoubtedly  have  been  a  success. 


As  a  result  of  our  study  we  conclude  that  the  state  income  tax  has 
been  a  failure,  due  to  the  failure  of  administration,  which,  in  turn,  may 
be  attributed  to  four  causes — the  method  of  self-assessment,  the  indifference 
of  state  officials,  the  persistent  effort  of  the  taxpayers  to  evade  the  tax, 
and  the  nature  of  the  income.  The  tax  cannot  be  successful  so  long  as 
taxpayers  desirous  of  evading  taxation  are  given  the  right  of  self-assess- 
ment. Since  all  attempts  to  change  the  method  of  self-assessment  have 
failed  and  the  nature  of  industry  in  the  states  is  at  present  such  as  to 
make  impossible  the  assessment  of  a  general  income  tax  at  the  source, 
we  are  forced  to  the  conclusion  that,  even  though  no  constitutional  ques- 
tion should  arise,  failure  will  continue  to  accompany  the  tax  until  our 
industrial  system  takes  on  such  form  as  to  make  possible  the  use  of  some 
method  other  than  self-assessment. 

Investigation  of  Income  Tax  by  Tax  Commissions 

The  subject  of  a  state  income  tax  has  been  treated  in  the 
reports  of  several  tax  commissions  in  recent  years.  While  most 
of  these  reports  commend  the  theory  of  an  income  tax,  nearly 
all  of  them  agree  that  it  is  incapable  of  practical  application  to 
the  existing  economic  and  political  conditions  of  the  American 
people.  This  was  the  conclusion  of  the  Maine  commission  in  1890 
and  of  the  Massachusetts  special  commission  of  1897.  The 
Massachusetts  report  says:  "In  the  present  situation  of  this 
country,  with  our  political  traditions  and  business  habits,  we  are 
of  the  opinion  that  an  income  tax  would  prove  exceedingly  diffi- 
cult to  administer  with  certainty  and  with  equality  of  treatment 
as  between  different  taxpayers.  .  .  Here  the  only  possible 
method  is  that  of  declaration  by  the  individual  taxpayer,  with 
all  its  possibilities  of  concealment,  equivocation,  false  statement, 
full  payment  by  the  honest,  evasion  by  the  dishonest,  and  con- 
stant temptation  for  evasion  and  false  statement  for  that  large 
class  of  men  neither  conspicuously  honest  nor  wilfully  dis- 
honest. .  We  fear  that  evasion  and  concealment  would  take 


TAXATION  315 

place  to  so  great  an  extent  as  to  render  it  ineffective  and  de- 
servedly unpopular." 

The  Wisconsin  commission  of  1898  says:  "Unlike  the  in- 
heritance tax,  it  is  easily  evaded,  is  a  temptation  to  fraud  and 
perjury,  and  has  not  generally  met  with  favor  in  other  states." 
The  New  York  commission  of  1902  characterized  the  tax  as 
"inquisitorial  and  against  the  republican  spirit,"  while  the  ma- 
jority report  of  the  special  commission  of  1907  regarded  it  as 
"inexpedient  and  inadvisable."  The  California  commission  of 
1906  referred  to  it  as  inadvisable  at  the  present  time,  but  recom- 
mended that  the  provision  be  retained  in  the  state  constitution 
for  future  use  if  changing  conditions  justified  its  adoption. 

On  the  other  hand,  the  Massachusetts  commissions  of  1875 
and  1893,  while  admitting  "a  lack  of  uniformity  in  its  construc- 
tion and  enforcement,  and  a  wide  difference  of  opinion  in  its 
worth"  recommended  that  the  income  tax  be  retained  as  a  part 
of  the  taxing  system  of  the  state.  The  minority  report  of  the 
Massachusetts  commission  of  1897  also  recommended  its  re- 
tention, while  the  minority  report  of  the  Maryland  commission 
of  1886  and  the  Pennsylvania  commission  of  1889  favored  the 
income  tax.  The  Minnesota  special  commission  of  1902  also  re- 
garded the  tax  with  favor  and  held  that,  if  wisely  laid  "it  would 
not  necessarily  result  in  more  revenue  but  in  a  more  equitable 
distribution  of  the  public  burden." 

Is  an  Income  Tax  Inquisitorial  and  Undemocratic? 

That  an  income  tax,  as  already  stated  in  this  chapter,  if  cap- 
able of  practical  application,  would  be  the  fairest  and  most 
equitable  tax  that  could  be  imposed  is  now  generally  admitted. 
But  there  is  a  wide  difference  of  opinion  as  to  how  far  the  state 
could  and  should  go  in  providing  machinery  for  the  enforcement 
of  such  a  law.  The  current  objection  that  an  income  tax  law 
capable  of  enforcement  would  be  inquisitorial  and  undemocratic 
may  have  force  and  yet  it  would  not  necessarily  be  any  more 
inquisitorial  than  the  present  federal  corporation  tax  law  and 
many  other  federal  laws  which  impose  either  direct  or  indirect 
taxes  on  privileges  and  business. 

The  tariff  laws  are  certainly  as  inquisitorial  as  an  income  tax 
law  would  be.  Not  only  are  you  required  to  make  a  disclosure 
of  the  nature  and  value  of  your  imports,  but  on  entering  an 


316  SELECTED   ARTICLES 

American  port  your  very  person  may  be  searched  if  suspected 
of  having  dutiable  goods  not  included  in  your  declaration  to 
the  collector  of  customs.  The  excise  tax  on  spirituous  and  malt 
liquors  and  tobacco  involves  a  searching  examination  into  the 
private  affairs  of  the  distiller,  the  brewer,  and  the  manufacturer 
of  tobacco.  Even  the  personal  property  tax  laws  of  our  own 
state  require  a  full  disclosure  of  the  kind  and  value  of  every 
item  of  personal  property  owned  by  a  citizen  of  the  state  and, 
if  strictly  enforced,  would  be  almost  as  inquisitorial  as  any  in- 
come tax  law  would  have  to  be.  We  are,  therefore,  not  inclined 
to  the  opinion  that  an  income  tax  is  necessarily  more  inquisi- 
torial than  many  other  forms  of  direct  taxation. 

Not  Successful  in  Other  States 

It  cannot  be  denied,  however,  that  the  income  tax  has  not 
been  a  success  in  those  states  that  have  experimented  with  it. 
While  this  failure  is  no  doubt  due  in  part  to  the  method  of  self- 
assessment  followed  in  this  country,  it  is  equally  true  that  the 
neglect  and  indifference  of  taxing  officials  in  the  enforcement  of 
the  law  has  largely  contributed  to  its  failure.  The  attitude  of 
the  taxpayer  has  also  contributed  to  the  failure  of  the  tax.  It 
has  never  been  supported  by  any  strong  public  sentiment.  No 
law  however  meritorious  in  principle  will  work  successfully  in 
practice  unless  there  is  a  strong  public  sentiment  in  favor  of  its 
enforcement. 

-    Nature  of  Income  Partly  to  Blame  for  Failure 

The  objection  that  the  nature  of  income  in  this  country  is 
such  as  to  make  evasion  of  the  tax  comparatively  easy  seems 
borne  out  by  the  experience  of  other  states  with  the  income  tax. 
It  is  doubtful  whether  the  principle  of  assessing  the  income  at 
its  source  could  be  successfully  applied  in  this  state,  and  as  many 
of  our  citizens  derive  a  considerable  part  of  their  income  from 
investments  in  other  states,  the  same  difficulties  in  ascertaining 
the  amount  of  the  income  would  be  met  with  as  we  now  experi- 
ence in  our  futile  attempt  to  reach  foreign  stocks  and  bonds  and 
other  intangible  personal  property  for  purposes  of  taxation.  If 
Professor  Cooley's  statement  that  "no  means  at  the  command 
of  the  government  has  ever  enabled  it  to  arrive  with  anything 
like  correctness  at  the  incomes  of  its  citizens"  is  true  then  an 


TAXATION  317 

income  tax  would  be  a  failure,  because  the  whole  structure  is 
built  upon  equality  of  sacrifice  and  unless  every  income  intended 
to  be  taxed  can  be  reached  no  equality  could  exist. 

Tendency  to  Evade  Taxation 

While  it  is  an  unfortunate  fact,  it  is  nevertheless  true  that 
many  citizens  who  should  contribute  to  the  support  of  govern- 
ment exercise  their  ingenuity  in  evading  the  payment  of  taxes, 
while  many  others  are  equally  zealous  in  concealing  as  much  of 
their  property  as  possible.  This  tendency  to  evasion  naturally 
affects  the  taxing  officials,  for  they  are  but  a  reflex  of  public 
sentiment,  hence  their  neglect  and  indifference  in  the  enforce- 
ment of  our  tax  laws.  The  stream  cannot  rise  higher  than  its 
source.  Until  the  public  conscience  of  the  average  taxpayer 
can  be  improved,  we  fear  it  is  idle  to  hope  for  a  successful  and 
equitable  taxation  of  incomes.  In  principle  an  income  tax  is 
the  most  just  and  equitable  that  could  be  imposed,  for  it  takes 
from  the  individual  amounts  more  equitably  proportioned  to  his 
ability  to  pay  than  any  other  form  of  taxation  yet  devised.  But 
in  practical  application  it  has  not  been  a  success  in  other  states 
of  the  Union  that  have  experimented  with  it,  and  it  is  scarcely 
reasonable  to  suppose  it  would  be  any  more  successful  in  Min- 
nesota. 

Conclusions 

As  a  result  of  our  investigation  we  are  of  the  opinion  that, 
under  present  conditions,  and  until  some  other  method  than  that 
of  self-assessment  can  be  devised,  and  until  the  development 
of  a  stronger  public  sentiment  favorable  to  the  strict  enforce- 
ment of  all  tax  laws,  an  income  tax  in  Minnesota  would  not 
prove  any  more  equitable  or  satisfactory  than  the  present  per- 
sonal property  tax. 

We  are  not  without  hope,  however,  that  some  equitable 
method  of  taxing  incomes  will  yet  be  devised.  Other  commis- 
sions, as  well  as  many  students  of  taxation,  are  engaged  in  the 
study  of  the  question  and  are  earnestly  endeavoring  to  solve 
the  problem  of  the  equitable  and  successful  taxation  of  incomes. 
It  will  be  the  policy  of  this  commission  to  continue  its  investiga- 
tion of  the  subject  in  the  hope  that  in  a  future  report  it  may 
be  able  to  offer  more  definite  suggestions  for  your  consideration 


SELECTED   ARTICLES 


STATE  INCOME  TAXES  x 

The  income  tax  is  indeed  an  admirable  tax  in  abstract  theory, 
but  we  feel  convinced  that  it  will  not  work  in  practice  in  New 
York.  The  general  property  tax  is  also  defensible  in  theory, 
but  it  has  been  found  not  to  work  in  practice  under  American 
conditions.  In  the  body  of  the  report,  the  personal  property 
tax  is  termed  ineffectual,  and  therefore  inequitable.  The  same 
would,  in  our  opinion,  be  true  of  the  income  tax.  It  would  not 
work  well  in  practice,  and  whatever  fails  to  work  in  practice  is 
indefensible  as  a  legislative  proposition.  In  fact,  it  is  easier  to 
levy  a  personal  property  tax  than  it  is  to  levy  an  income  tax; 
for  some  personal  property  at  all  .events  is  tangible  and  visible, 
while  no  part  of  income  is  ever  tangible  or  visible.  The  income 
tax  has  been  tried  in  many  of  the  American  states,  and  now 
exists  in  several  commonwealths.  It  has  always  been  a  dismal 
failure.  What  reason  is  there  for  supposing  that  what  has 
always  been  a  failure  will,  at  once,  become  a  success?  The 
reason  of  the  failure  is  to  be  found  in  the  economic  and  political 
conditions  of  American  life.  Those  conditions  cannot  be  changed 
by  law.  They  are  the  same  conditions  which  have  made  the  per- 
sonal property  tax  a  failure. 

The  second  objection  is  that  which  is  due  to  interstate  com- 
plications. The  income  tax  theory  assumes  that  all  the  people 
subject  to  the  tax  secure  their  income  in  the  state,  and  that  all 
people  receiving  an  income  in  the  state  live  in  the  state.  Both 
assumptions  are  illegitimate.  A  man  may  live  in  New  York  and 
get  his  income  from  all  over  the  country;  or  a  man  may  get  his 
income  from  New  York  sources  and  live  elsewhere.  Any 
attempt  to  legislate  for  the  whole  country  by  a  New  York  law 
must  inevitably  fail. 

Suppose,  for  instance,  that  a  resident  of  another  state  hap- 
pens to  spend  several  months  in  New  York  on  a  pleasure  trip. 
According  to  the  scheme  suggested,  he  would  be  subject  to  a 
tax  on  his  entire  income,  irrespective  of  the  question  whether 
he  was  already  being  taxed  on  his  income  or  on  his  personal 
property  in  the  state  of  his  residence.  This  would  create  an 

1  Report  of  the  Special  Tax  Commission  of  the  State  of  New  York. 
1907.  p.  46. 


TAXATION  319 

intolerable  situation.  Moreover,  a  man  might  carry  on  his  busi- 
ness through  agents  in  New  York  City,  and  might  live  in  New 
Jersey  or  Rhode  Island  and  thus  completely  escape  taxation. 
Instances  of  these  interstate  complications  might  be  multiplied 
indefinitely  and  would  show  how  impossible  it  would  be  to  reach 
any  uniformity  of  burden  by  making  the  income  tax  a  state  or 
local  tax.  Economic  and  business  life  in  the  United  States  has 
become  a  national  life ;  it  has  transcended  state  boundaries.  Any 
attempt  by  a  single  state  to  run  against  this  current  is  doomed 
to  failure. 

The  third  objection  is  that  of  practical  inequality.  So  far 
as  the  tax  would  work  at  all,  it  would,  in  the  opinion  of  your 
Commissioners,  work  spasmodically  and  would  produce  injustice. 
The  rich  man  would  stand  from  under,  as  he  does  at  present 
with  the  personal  property  tax,  especially  in  those  states  which 
have  a  listing  system.  Either  he  would  live  without  the  state 
and  conduct  his  business  here  through  agents,  or  he  would  so 
arrange  his  affairs  as  to  secure  most  of  his  income  from  extra- 
state  sources  which  could  not  be  reached  and  which  could  be 
so  manipulated  as  not  to  show  in  his  books.  While  the  aim 
of  the  law  would  be  to  press  less  hardly  upon  the  moderate 
and  fairly  well-to-do  class,  the  practical  result  would  be,  in 
our  opinion,  to  impose  the  burden  upon  these  very  sections  of 
the  community,  and  to  exempt  the  wealthier  classes  who  can 
afford  to  employ  the  most  astute  legal  talent  to  aid  them  in 
evading  the  law.  The  tax  would  seek  to  secure  equality ;  it  would 
result  in  crass  inequality. 

The  fourth  objection  is  that  an  income  tax  of  the  kind 
recommended  would  lead  to  corruption.  As  is  well  known, 
there  are  two  methods  of  levying  an  income  tax.  The  one 
is  to  assess  the  recipients  of  the  income  directly  upon  their 
entire  income.  This  is  sometimes  called  the  lump-sum  income 
tax.  The  other  method  is  to  assess  the  tax,  not  upon  the 
person  who  receives  the  income,  but  upon  the  person  who  pays 
the  income,  thus  deducting  the  tax  from  the  amounts  payable 
to  the  income  receiver.  This  is  sometimes  called  the  stoppage- 
at-source  income  tax.  .  .  The  income  tax  bill  discussed  by  our 
colleagues  proposes  to  reintroduce  the  discredited  methods  which 
have  never  worked  well  in  Anglo-Saxon  countries  and  which 
have  been  abandoned  as  far  as  possible  in  England.  No  one 
who  is  at  all  acquainted  with  the  administrative  conditions  in 


320  SELECTED   ARTICLES 

the  United  States  or  with  the  difference  as  between  Germany 
and  America  in  the  attitude  of  the  average  citizen  to  the  admin- 
istration can  entertain  much  doubt  that  German  methods  are 
inapplicable  in  this  country.  We  feel  that  the  only  result  of 
levying  such  a  direct  income  tax,  resting  on  the  listing  of  all 
incomes  by  the  taxpayers,  would  be  precisely  as  in  the  case  of  a 
rigorous  personal  property  tax,  to  increase,  not  equality,  but 
perjury  and  corruption.  The  law  would  either  remain  a  dead 
letter,  as  is  the  case  in  most  of  the  American  states  where  the 
income  tax  is  now  imposed,  or  it  would  tend  to  create  illicit 
bargains  between  the  taxpayers  and  the  assessors,  as  is  now  the 
case  in  almost  every  state  of  this  country  where  the  listing  sys- 
iem  has  been  introduced  and  where  great  power  is  given  to  the 
assessors  in  connection  with  the  tax  on  personal  property. 

The  rich  experience  of  the  United  States  shows  conclusively 
that  an  income  tax  of  the  kind  recommended  by  our  colleagues 
would  be  ineffective.  Even  the  national  income  tax,  during  the 
Civil  War,  was  a  notorious  offender  in  this  respect.  .  .  The 
state  income  taxes  which  are  found  at  the  present  time  are  mere 
farces,  and  there  is,  in  our  opinion,  no  reason  to  expect  much 
better  results  in  New  York.  Human  nature  is  about  the  same 
in  New  York  as  it  is  everywhere  else. 

While  there  is,  in  our  opinion,  no  doubt  as  to  the  inadvis- 
ability  of  an  income  tax  of  the  kind  recommended  by  our 
colleagues,  the  question  arises  whether  a  different  method  of 
levying  and  administering  the  income  tax  might  not  remove 
most  of  the  above  objections.  As  an  abstract  proposition, 
again,  we  do  indeed  believe  that  a  stoppage-at-source  income 
tax  as  employed  at  the  present  time  in  England"  is  far  pref- 
erable to  the  lump-sum  income  tax  discussed  by  our  colleagues. 
Even  the  adoption  of  the  English  system,  however,  would  not, 
in  our  opinion,  completely  remove  the  objections  to  an  income 
tax. 

Our  chief  doubt  arises  from  the  fact  that  the  English  system 
is  not  applicable  to  American  conditions  within  the  separate 
states.  In  England  almost  everyone  who  receives  dividends 
or  interest  on  his  securities,  domestic  or  foreign,  receives  them 
through  a  banker,  who  is  compelled  to  make  returns  to  the 
income-tax  board.  In  America  a  man  keeps  his  securities  in 
safe  deposit  vaults,  cuts  off  his  coupons  and  deposits  them 
for  collection  in  a  bank,  which  is,  as  often  as  not,  situated  in 


TAXATION  321 

another  state.  Bonds,  moreover,  are  not  usually  registered  in 
the  name  of  the  owner,  so  that  it  would  be  almost  impossible 
for  a  bank  or  an  agency  to  know  whether  the  person  who  has 
so  deposited  the  coupons  is  the  owner  or  the  assignee.  Moreover, 
to  the  extent  that  a  man's  income  is  derived  from  foreign 
corporations — and  the  great  mass  of  New  York  incomes  is 
derived  in  that  way — it  would  be  impracticable  to  reach  the 
foreign  agencies  or  organizations,  for  a  state  income  tax  could 
not  apply  to  extra-state  corporations.  In  short,  looked  at  from 
any  point  of  view,  the  whole  system  of  stoppage  at  source,  as 
applied  to  its  most  important  point,  namely,  the  income  from 
intangible  securities,  would  break  down  almost  completely,  except 
in  so  far  as  New  York  corporations  are  concerned.  It  is  easy 
to  see  that  the  probable  result  of  such  a  law  would  be  to 
transfer  investments  to  foreign  corporations.  .  . 

In  short,  we  incline  to  the  opinion  that  even  if  the  income 
tax  is  advisable  at  all,  it  is  advisable  at  present  only  as  a 
federal  tax.  As  long  as  New  York  is  surrounded  by  common- 
wealths which  seek  to  attract  to  themselves  much  of  the  wealth 
of  their  rival,  it  is  unreasonable  to  expect  a  development  of 
interstate  comity  in  taxation  which  would  redound  to  their  dis- 
advantage. Such  an  interstate  comity  can  probably  be  forced 
upon  the  American  commonwealths  only  from  above;  and  it  is 
a  debatable  question  whether  the  national  government  has  the 
constitutional  power  to  do  this.  At  all  events,  for  New  York 
State  to  act  independently  in  this  matter  would  be,  in  our 
opinion,  highly  inexpedient. 

We,  therefore,  conclude  that  any  form  of  state  income  tax 
is  at  present  inadvisable.  Some  of  the  undersigned  were  years 
ago  in  favor  of  such  a  scheme,  but  a  closer  acquaintance  with 
the  administrative  and  economic  conditions  of  American  life 
has  forced  them  to  the  conclusion  that  a  state  income  tax  would 
be  a  failure.  The  project  is  beautiful  in  fiscal  theory,  but  use- 
less in  actual  practice.  .  . 

Whatever  may  be  the  situation  in  future  years,  your  Com- 
missioners are  convinced  that  to  advance  the  project  of  a 
direct  state  income  tax  at  the  present  time  is  an  iridescent 
dream.  The  scheme  might  succeed  in  bringing  in  some  revenue, 
but  it  would,  in  our  opinion,  be  sure  to  bring  in  its  train  in- 
equality, fraud  and  corruption.  Far  from  being  a  remedy  for 
our  present  evils  it  would  only  accentuate  those  evils. 


322  SELECTED  ARTICLES 

It  is  for  these  reasons  that  we  consider  the  imposition  at 
the  present  time  of  a  direct  state  income  tax  inexpedient  and 
inadvisable. 


MINORITY  REPORT,  NEW  YORK  COMMITTEE l 

The  undersigned  members  of  the  Committee  appointed  under 
a  joint  resolution  of  the  Assembly  and  Senate  of  the  State  of 
New  York  to  examine  the  laws  of  this  state  and  of  other  states 
relative  to  taxation,  and  to  investigate  into  the  systems  and 
methods  of  taxation,  particularly  with  regard  to  the  best  meth- 
ods of  equitably  and  effectually  reaching  all  of  the  property 
which  should  be  subject  to  taxation,  herewith  submit  the  fol- 
lowing report  in  which  we  differ  from  the  conclusions  and 
recommendations  arrived  at  by  our  colleagues: 
*  *  * 

Defects  in  our  System  of  Taxation 

The  great  fault  with  our  entire  system  of  taxation  lies  in  a 
lack  of  centralized  administration,  and  that  is  due  to  the  origin 
and  growth  of  our  tax  system  which  started  from  below  up,  and 
not  from  the  top  down.  In  other  words,  our  system  of  taxation 
both  on  land  and  personalty  was  entirely  a  local  system  originat- 
ing in  colonial  times,  making  each  town,  ward  and  city  an  inde- 
pendent tax  unit.  It  is  not  to  be  wondered  at  therefore  that 
there  should  have  been  serious  difficulties  and  discrepancies  in 
the  various  methods  of  local  taxation  under  which  we  find  real 
estate  assessed  in  different  parts  of  the  state  at  from  40  per 
cent  to  100  per  cent  of  its  value,  and  personal  property  either 
assessed  not  at  all  or  to  a  nominal  extent.  Added  to  this,  and 
perhaps  because  of  it,  we  have  constitutional  provisions  which 
make  it  difficult  to  enforce  a  uniform  system  of  taxation,  and 
even  more  difficult  to  impose  any  new  system  of  state  taxation 
having  real  or  personal  property  as  a  base. 

State  System  of  Indirect  Taxes 

It  is  only  since  the  year  1880  that  the  State  of  New  York  has 
adopted  a  centralized  system  of  taxation  based  largely  on  corpo- 

1  Minority  Report  of  the  Joint  Legislative  Committee  on  Taxation. 
New  York.  1916. 


TAXATION  323 

rate  franchises,  excises  and  privileges  derived  from  the  state, 
so  that  notwithstanding  the  difficulties  under  which  we  are  labor- 
ing, and  despite  a  constitution  which  to  a  very  large  extent 
fastens  this  local  and  decentralized  system  upon  us,  with  im- 
proved laws  having  a  proper  and  legal  base  of  taxation,  enforce- 
able under  central  authority,  we  will  eventually  arrive  at  a  more 
uniform  and  logical  system  of  taxation. 

Proposed  State  Income  Tax 

Now  as  to  the  remedy  which  our  associates  on  the  Committee 
have  suggested  for  the  evils  of  the  general  property  tax  system 
in  the  form  of  an  income  tax,  we  are  by  no  means  in  accord. 
Income  means  ability  to  pay,  but  so  does  capital,  and  the  latter 
requires  the  services  and  protection  of  the  state  more  than  the 
former.  We  know  of  no  great  state  in  the  Union  which  has  en- 
tirely supplanted  its  local  system  of  taxing  personal  property, 
and  its  state  system  of  taxing  miscellaneous  corporations,  with 
a  state  income  tax.  The  ability  to  pay  theory  is  not  the  only 
theory  on  which  property  pays  a  tax;  concessions  and  privileges 
from  the  state,  irrespective  of  income,  and  property  which  may 
be  accumulating  but  yields  no  income,  all  of  which  obtains  the 
protection  and  services  of  the  state  government,  have  always 
been  a  favorite  basis  on  which  taxes  have  been  assessed  and 
paid. 

Wisconsin  State  Income  Tax.    Experience  of  Massachusetts 

Wisconsin  is  the  only  state  of  any  importance  that  has 
today  an  income  tax  enforced  with  any  degree  of  efficiency,  and 
that  supplements  rather  than  takes  the  place  of  its  personal  prop- 
erty tax  system.  Wisconsin,  however,  has  no  classified  property 
tax  which  we  have  in  New  York,  from  which  nearly  $50,000,000 
of  indirect  taxes  are  obtained  from  personal  property.  To 
understand  just  how  much  we  get  from  this  source  we  need  only 
make  the  following  tabulation  for  the  fiscal  year  ending  October 
i,  1914: 

Excises     $9,360,000 

Corporations 1 1,634,000 

Organization  of  corporations 345,000 

Transfer    Tax     11,162,500 

Stock   Transfer   Tax    2,056,680 

Secured    Debt    Tax    828,619 

Mortgages   1,390,746 

Motor   vehicles    1,528,220 


324  SELECTED    ARTICLES 

If  we  add  to  this  aggregate  the  excise  and  mortgage  taxes 
paid  to  the  localities  we  find  that  nearly  $50,000,000  is  derived 
from  the  indirect  taxation  of  personal  property  in  the  state. 

If  we  correctly  understand  the  recommendations  of  our  col- 
leagues for  a  state  income  tax  they  propose  to  tax  the  income 
from  the  sources  covered  by  the  above  taxes,  without  relieving 
the  owners  of  the  property  from  the  indirect  taxes.  It  seems  to 
us  that  to  tax  the  income  in  addition  to  the  property  from  which 
it  comes  is  in  the  nature  of  double  taxation. 

It  is  true  that  the  state  of  Massachusetts  has,  through  a  com- 
mittee, recommended  a  modified  income  tax  on  securities  and 
interest-bearing  certificates,  as  well  as  on  salaries  and  profes- 
sional incomes  over  $2,000,  but  the  recommendations  of  the 
Committee  have  not  been  as  yet  put  into  the  form  of  law,  and 
the  proposed  law  does  not  interfere  with  the  taxation  of  corpo- 
rations. In  both  of  these  states,  however,  it  is  to  be  borne  in 
mind  that  constitutional  amendments  have  been  proposed  and 
carried  under  which  income  tax  laws  could  be  passed.  The 
courts  have  generally  held  that  a  tax  on  income  is  a  tax  on 
property.  (Pollock  v.  Farmers'  L.  &  T.  Co.,  157  U.S.  429;  In  re 
Opinion  of  Massachusetts  Justices,  195  Mass.  607.)  If  so,  we 
are  confronted  with  the  objection  that  under  our  Home  Rule 
provision  of  the  State  Constitution,  article  10,  section  2,  no 
income  tax  can  be  administered  except  through  the  local  asses- 
sors. In  the  case  of  People  ex  rel.  Metropolitan  Street  Rail- 
way Co.  v.  The  Tax  Commissioners,  174  N.Y.  417;  as  well  as 
in  the  later  case  of  People  ex  rel.  Pelham  v.  Pelham,  215  N.Y. 
374,  it  was  clearly  held  that  the  functions  of  the  local  assessors 
could  not  be  assumed  by,  or  delegated  to,  any  other  officer  or 
body ;  and  it  is  manifest  that  if  the  income  tax  is  not  administered 
by  the  State  Tax  Commission  or  a  central  board  it  will  be  as 
great  a  farce  as  the  present  personal  tax  system. 

Let  us  assume,  however,  that  the  State  Income  Tax  is  consti- 
tutional and  legal  and  that  such  a  law  could  be  carried  into 
effect,  how  would  it  work?  Would  it  bear  on  the  entire  com- 
munity generally,  or  would  those  that  were  most  able  to  pay 
escape  the  burden  of  the  tax? 

The  following  table  is  taken  from  the  1914  annual  report  of 
the  Tax  Commission  of  Wisconsin  where  under  an  efficient  and 
centralized  administration  we  find  how  the  tax  is  distributed  and 
upon  whom  the  burden  rests. 


TAXATION 


325 


46^  tx  ti.  «i  <»  H-  06  N  4oc  NoN 

«/>  N   •-  OC  ^GO  (XH.MroNv.- 


till 


M    INOO 


.  4-\o  vo  tx  fj  io\O  6  -4 
M  \O   O   "-1   >-<   <OOO   i-iO^ 


°  E  2"  oo  !£ ' 

*»M    M 


txMNtxOO 


o  oo^oo  >o  -*oo 
o~  o!  oT  i-Tvd^  tx 

N   <S        00 


II  al 


•*  N  VO  \C   O 
mtxtxtxTj- 

pi  oo  4  wvo 


OO   N  vo   tx  ioOO   O  OO  V 
M   fO«>-   io«   fOQ 

4«-'vdi»>  '(opj 


O   -H   tx  1-1    ro  O  00 
VO   tx  o  vo    ^t  fO  uo 


M  p  0    o\  fo   \o6  o»vo  M     v    n  »o  10     tx        jf 

w    f^)txtx(s    fOOOOO   txtxOvO    OviO1-1   M   W^>  <V) 
O\VO   N   P)   ION    wOOOO   ^OOVO   C^O>M    OiVq^OO^  O  OO^  «O 

&*mo*oO'£wif)>*o*o  m\o  pf  4  oi  d^vo"oo  »C 
roioostxovo  1-1  tOTj-fo  o>oo  N  n  <s  o  « 


oo 


6O 


IO 


326  SELECTED   ARTICLES 

Difficulty  of  Taxing  Non-Residents  in  New  York 

Whatever  may  be  the  result  of  the  working  of  the  system  in 
Wisconsin,  where  two-thirds  of  the  total  number  subject  to  the 
income  tax  pay  on  incomes  of  less  than  $1,000,  and  the  entire 
income  tax,  exclusive  of  the  offset  derived  from  the  personal 
property  tax,  amounts  to  a  little  over  $2,000,000,  we  have  in  the 
State  of  New  York  peculiar  conditions  which  will  make  it  easy 
for  the  non-resident  or  foreign  corporation  to  seek  another 
habitat,  or  by  constitutional  or  legal  reasons  to  escape  the  tax 
entirely.  In  this  state  there  is  a  larger  aggregation  of  non- 
resident wealth  and  capital  than  in  any  other  state  of  the 
Union.  Financially  New  York  city  is  the  capital  of  the  United 
States,  and  if  our  tax  system  is  not  made  too  onerous  it  may 
soon  be  the  financial  capital  of  the  world.  A  very  large  por- 
tion of  the  income  earned  in  this  state  belongs  to  non-residents 
and  foreign  corporations  doing  business  here.  In  other  words, 
it  has  its  situs  or  home  at  the  residence  of  the  non-resident,  and 
not  within  the  state.  The  State  of  Massachusetts  does  not 
seek  to  subject  the  income  of  its  non-residents  to  a  tax  in  its 
proposed  law,  which  applies  only  to  "inhabitants,"  nor  are  we 
able  to  ascertain  that  any  effort  is  made  to  collect  any  appre- 
ciable part  of  the  tax  from  the  capital  of  non-residents  in  the 
State  of  Wisconsin.  In  the  face  of  the  decision  of  the  Court 
of  Appeals  in  The  City  of  New  York  v.  McLean,  170  N.Y.  374, 
we  do  not  know  how  it  will  be  possible  to  collect  a  tax  from 
non-residents  under  sections  359  and  360  of  the  proposed  In- 
come Tax  Law;  nor  do  we  believe  it  can  be  done  tinder  any 
State  Income  Tax  Law.  If  those  intended  to  be  subject  to  the 
tax  under  the  proposed  law  are  not  lucky  enough  to  have  a 
residence  out  of  the  state  they  may  turn  their  property  over 
to  foreign  corporations  who  will  escape  the  tax,  and  in  this 
way  New  York  will  devise  a  tax  law  for  the  benefit  of  the 
treasuries  of  her  sister  states  by  driving  capital  out  of  her  own 
state. 

Difficulty  of  Collecting  Income  Tax  in  Wisconsin 

Even  in  the  State  of  Wisconsin,  where  the  public  have  not 
yet  become  educated  in  methods  of  tax-dodging,  the  collection 
of  the  income  tax  has  already  in  the  third  year  of  its  admin- 
istration became  a  serious  question,  for  says  the  1914  Report: 


TAXATION  327 

.  .  .  After  the  delinquent  roll  comes  to  the  county  treasurer,  the 
sheriffs,  as  a  rule,  make  no  earnest  or  persistent  effort  to  collect.  There 
are  marked  exceptions,  of  course.  The  local  treasurers  of  some  munici- 
"palities  and  the  sheriffs  of  some  counties  do  make  real  and  consistent 
efforts  to  collect  the  delinquent  taxes.  But  for  the  most  part  the  law  is 
a  dead  letter. 

There  are  reasons,  of  course,  for  the  existing  conditions.  Forcible 
collection  of  taxes  is  a  disagreeable  and  unpopular  work.  The  man  who 
respected  and  obeyed  the  mandate  of  the  legislature  and  fully  enforced 
the  law  would  be  very  likely  to  lose  his  office.  In  some  cases  the  execu- 
tion of  the  law  would  work  real  hardship.  And  local  treasurers — although 
paid  larger  salaries  than  assessors  for  a  much  less  onerous  and  difficult 
service — are  nevertheless  probably  not  paid  enough  to  warrant  widespread 
activity  in  the  collection  of  the  more  difficult  tax  bills.  The  same  is  true 
as  to  county  treasurers  and  sheriffs  when  the  tax  roll  reaches  them.  It 
is  also  possible  that  the  law  itself  is  too  harsh  and  should  be  changed.  .  . 

At  present  the  delinquent  tax  goes  very  largely  by  default  and  those 
who  are  honest  pay,  while  the  crafty  and  recalcitrant  escape.  That  so 
large  a  proportion  of  those  subject  to  personal  property  and  income  taxes 
pay  promptly  and  voluntarily  is  a  tribute  to  the  civic  spirit  of  the  average 
Wisconsin  taxpayer. 

Can  our  colleagues  believe  that  fifty  years  of  experience  with 
our  personal  tax  system  will  make  delinquents  under  their  own 
proposed  income  tax  law  less  agile  in  evading  the  tax-gatherer, 
or  do  they  rely  on  the  "civic  spirit  of  the  average  New  York 
taxpayer"  to  collect  delinquent  income  taxes? 

English  and  United  States  Income  Tax  Laws 

It  is  interesting  to  know  from  recent  reports  that  in  England, 
which  is  the  original  home  of  the  income  tax,  and  where  it 
has  flourished  for  nearly  one  hundred  years,  the  system  in  actual 
practice  has  been  described  by  a  commissioner  of  internal  revenue 
at  an  inquiry  held  some  years  ago  as  an  "antiquated  and  hap- 
hazard system  putting  a  premium  on  fraud  and  enabling  the 
dishonest  taxpayer  to  evade  his  burden  at  the  expense  of  the 
honest  taxpayer."  If  this  has  occurred  in  England,  what  may 
be  expected  under  the  difficulties  surrounding  our  dual  system 
of  state  and  Federal  government? 

In  the  United  States  last  year  357,515  persons  paid  the 
federal  income  tax,  of  whom  more  than  one-fifth  were  in  the 
state  of  New  York.  In  other  words,  about  one  person  out  of 
every  two  hundred  paid  an  income  tax,  and  we  venture  to 
predict  that  if  the  exemptions  are  not  lowered  and  the  law  re- 
mains practically  the  same,  in  five  years  not  more  than  one 
in  every  three  hundred  will  pay  the  tax.  As  the  administrative 
machinery  of  the  federal  government  becomes  stricter  and  more 
inquisitorial  the  inventive  resources  of  the  tax-dodger  will  be- 
come more  highly  developed  in  his  ability  to  evade  the  tax. 


328  SELECTED   ARTICLES 

The  proposal  to  levy  state  taxes  on  the  income  of  the  inhab- 
itants of  the  State  of  New  York  is  in  conflict  with  the  system 
of  taxation  in  force  for  over  a  hundred  years  in  the  United 
States  of  America.  The  course  of  events  in  this  country  dis- 
closes a  tacit  understanding,  almost  inviolate  between  the  Fed- 
eral government  and  the  governments  of  the  states  of  the 
Union,  that  the  states  will  not  levy  taxes  upon  the  same  sub- 
ject-matters first  appropriated  by  the  United  States. 

From  the  foundation  of  the  Federal  government  it  has  levied 
its  taxes,  by  the  consent  of  the  people  of  the  states,  either  at 
seaports,  known  as  ports  of  entry,  or  else  by  the  excise  taxes, 
known  as  internal  revenue  taxes ;  leaving  to  the  states  of  the 
Union  taxes  levied  on  the  property  within  their  several  jurisdic- 
tions. By  a  recent  amendment  to  the  Federal  Constitution  the 
United  States  is  now  permitted  to  tax,  and  does  tax,  the  incomes 
of  its  citizens  wherever  resident.  If  the  State  of  New  York 
shall  hereafter 'proceed  to  tax  the  incomes  of  those  citizens  of 
New  York  already  paying  income  taxes  to  their  general  govern- 
ment, it  will  be  a  violation  of  the  tacit  distribution  of  the  taxing 
powers  so  long  acquiesced  in  throughout  the  United  States. 

In  practical  operation  double  taxes  upon  the  same  subject- 
matter,  levied  by  two  governments,  state  and  Federal,  will  create 
great  dissatisfaction  among  the  people  of  this  state.  Our  people 
will  think,  and  think  rightly  to  some  extent,  that  they  are  being 
subjected  to  too  much  government  in  times  of  peace.  This  is 
always,  in  all  ages,  one  objection  to  any  federal  plan  of  govern- 
ment. We  should  not  willingly  add  force  to  this  objection.  In 
times  of  war  our  people  are  patriotic  enough  to  yield,  in  any 
manner  government  sees  fit  to  adopt,  all  the  revenue  which 
either  the  state  or  the  Federal  government  needs  for  the  pub- 
lic security  or  protection.  But  in  times  of  peace  the  people  of 
this  state  will  not,  we  venture  to  affirm,  tamely  submit,  for  a 
long  space  of  time,  to  two  sets  of  governmental  tax-gatherers 
demanding  taxes  from  the  same  sources  of  revenue.  There  is 
no  reason  at  this  time,  in  our  judgment,  why  they  should  so  sub- 
mit. There  are  other  adequate  sources  of  revenue,  besides  taxes 
on  the  income  of  our  citizens,  which  are  open  to  the  state,  and 
these  should  be  first  exhausted  before  a  resort  is  had  to  the  in- 
comes now  subjected  to  taxation  by  the  Federal  authorities. 


TAXATION  329 

Remedies  Offered  as  a  Substitute  for  the  Income  Tax 

Our  associates  on  the  Committee  propose  with  one  stroke  of 
the  pen  to  take  away  from  the  local  assessor  at  least  $500,000,000 
of  taxable  property  by  wiping  out  the  Personal  Tax  Law.  Not 
content  with  this  they  also  propose  to  cripple  the  State  Franchise 
Tax  Law  by  taking  away  at  least  $2,000,000  of  the  annual  tax 
now  imposed  on  miscellaneous  corporations,  and  there  is  ser- 
ious doubt  whether  this  amendment  would  not  endanger  at  least 
$10,000,000  of  yearly  franchise  taxes  under  the  correlated  sec- 
tions of  the  law.  The  Francise  Tax  Law  of  this  state  has  been 
in  operation  for  nearly  thirty  years  and  has  been  passed  on  in 
all  its  phases  by  the  highest  courts  of  this  state,  and  in  its  most 
important  features  by  the  Supreme  Court  of  the  United  States. 
It  provides  a  revenue  of  nearly  $12,000,000,  and  with  some 
amendments  it  could  be  made  to  produce  a  revenue  of 
$25,000,000.  So  eminent  an  authority  as  President  Purdy,  of 
the  Board  of  Taxes  and  Assessments  of  the  City  of  New  York, 
has  said  that  the  Franchise  Tax  Law,  which  is  capable  of  a 
central  and  uniform  administration,  could  be  modeled  into  a 
very  good  statute  having  all  the  advantages  claimed  for  the  pro- 
posed Income  Tax  Law  recommended  by  our  associates,  and 
none  of  its  disadvantages.  It  would  be  legal  and  constitutional, 
and  it  could  not  be  evaded  by  non-resident  corporations,  and  it 
would  bring  sufficient  revenue  to  supply  in  part  the  needs  of  the 
government,  and  if  section  12  of  the  Tax  Law  assessing  corpor- 
ations on  their  capital  stock  for  local  purposes  were  repealed, 
part  of  the  tax  could  be  distributed  to  the  state  and  part  to  the 
localities. 

Amendment  of  Franchise  Tax  Lazv 

Partly  in  line  with  these  suggestions,  and  partly  in  conform- 
ity with  suggestions  from  the  State  Tax  Commission  and  the 
State  Comptroller's  office,  the  undersigned  have  agreed  upon 
certain  changes  to  the  present  State  Corporation  Tax  Law, 
amending  sections  180,  181,  182,  183  and  correlated  sections  of 
the  Franchise  Tax  Law.  The  effect  of  these  amendments,  to- 
gether with  the  changes  in  the  Inheritance  Tax  Law,  discussed 
later,  with  a  reasonable  return  to  the  localities,  in  each  case, 
will,  in  our  opinion,  result  in  more  "effectually  reaching  all  of 
the  property  which  should  be  subject  to  taxation."  Tf  the  rates 
under  the  franchise  tax  are  increased  and  section  12  abolished 


330  SELECTED    ARTICLES 

the  same  amount  of  revenue  might  be  returned  to  the  localities 
and  the  evils  under  section  12  entirely  done  away  with.  It  will 
then  no  longer  be  possible  for  a  corporation  to  do  business  in 
the  City  of  New  York  and  file  its  certificate  in  Esopus  or 
Painted  Post,  and  thus  escape  taxation. 

The  following  are  the  principal  changes  recommended: 
Section  180  of  the  Franchise  Tax  Law  is  amended  so  that  no 
organization  tax  shall  be  less  than  $10,  and  section  181,  relating 
to  the  license  tax  on  foreign  corporations,  is  likewise  amended  so 
that  the  same  minimum  tax  be  paid  by  a  foreign  corporation. 
The  changes  in  section  182  make  it  more  intelligible  and  in 
harmony  with  the  original  intent  of  the  framers.  Under  the 
present  law  there  are  about  fifty  thousand  corporations  who  file 
reports  under  section  182  of  the  Tax  Law,  and  about  15  per 
cent  of  the  entire  number  pay  no  tax  at  all,  because  either 
their  bonded  indebtedness  or  their  general  liabilities  exceed  their 
assets.  About  40  per  cent  of  the  remainder  pay  an  average  tax 
of  less  than  $2.  Under  the  proposed  law  no  annual  franchise 
tax  shall  be  less  than  $10,  or  less  than  three-quarters  of  a  mill 
on  the  par  value  of  the  capital  stock.  If  the  actual  value  of  the 
assets  exceeds  the  par  value  of  the  capital  stock,  or  if  the 
market  price  of  the  stock  exceeds  the  par  value  of  the  capital 
stock,  the  tax  shall  be  based  on  whichever  of  these  valuations 
shall  be  highest.  If  a  corporation  pays  a  dividend  of  more  than 
3  per  cent  the  tax  shall  be  at  the  rate  of  one-quarter  of  a  mill 
for  each  per  centum  of  dividend.  The  basis  of  valuation  has 
also  been  changed  so  as  to  include  the  bonds  as  well  as  the 
stock,  instead  of  on  the  capital  stock  alone.  Two  corporations, 
one  with  a  $1,000,000  of  capital  stock  without  any  bond  issue, 
should  not  be  treated  any  differently  than  a  corporation  that 
commences  business  with  $500,000  of  capital  stock  and  $500,000 
in  bonds.  From  the  economic  standpoint  the  capital  of  both 
corporations  is  the  same  and  should  be  treated  alike.  In  this 
connection  we  desire  to  call  attention  to  an  extract  from  the 
last  report  of  the  State  Comptroller : 

Your  attention  is  respectfully  called  to  transactions  in  connection  with 
the  reduction  of  capital  stock  which  seem  to  be  arising  somewhat  fre- 
quently of  late,  where  corporations  are  seeking  to  reduce  capital,  and,  as 
a  part  of  the  same  adjustment,  issue  bonds,  notes  or  other  obligations  in 
exchange  for  the  retired  capital.  When  corporations  proposing  to  reduce 
their  capital  stock  have  met  the  requirements  of  the  Stock  Corporation 
Law,  the  Comptroller,  under  section  64  of  that  law,  is  directed  to  approve 
of  the  reduction.  Unless  corrective  legislation  is  enacted,  this  office  is 


TAXATION  33i 

placed  in  the  apparent  position  of  giving  its  approval  to  the  subtle  strat- 
agems of  tax-dodgers. 

From  the  standpoint  of  public  policy  of  the  state,  particularly  as 
regards  its  taxing  power,  in  view  of  the  fact  that  such  action  seems 
to  be  an  effort  to  transpose  the  payment  of  dividends  upon  stock  into  the 
payment  of  interest  upon  notes,  bonds  or  other  obligations,  and  thus 
greatly  reduce  and  perhaps  almost  entirely  evade  the  tax  on  franchise 
imposed  under  section  182  of  the  Tax  Law,  it  would  seem  fitting  that 
an  equivalent  tax  should  be  levied  upon  all  interest-bearing  obligations 
negotiated  in  lieu  of  assessable  capital  stock. 

Manifestly  this  condition  should  be  remedied  and  your  thoughtful 
attention  is  respectfully  requested  to  the  end  that  the  state's  sources  of 
revenue  may  not  be  further  endangered. 

Exemption  of  Manufacturing  Companies  to  be  Repealed 

Section  183  is  amended  so  as  to  permit  the  taxation  of  manu- 
facturing, mining  and  laundering  companies,  agricultural  and 
horticulturist  associations.  There  is  no  reason  why  these  com- 
panies should  be  exempt  from  state  taxation,  thus  giving  them 
an  undue  advantage  over  non-manufacturing  corporations,  and 
we  believe  that  the  small  annual  tax  required  of  these  corpora- 
tions will  not  induce  them  to  move  out  of  the  state.  The 
remaining  changes  that  we  recommend  in  the  Franchise  Tax 
Law  are  administrative,  and  comprehend  a  more  convenient 
assessment  and  effective  collection  of  the  tax. 

We  estimate  that  the  proposed  changes  in  the  Franchise  Tax 
Law  will  bring  into  the  treasury  of  the  state  additional  revenue 
of  about  $12,000,000  per  year.  This  is  based  on  a  minimum 
rate  of  three-quarters  of  a  mill  on  the  par  value  of  the  capital 
stock,  irrespective  of  the  higher  rates  that  would  be  paid  by 
corporations  earning  a  greater  dividend  than  3  per  cent.  The 
figures  which  we  have  used  in  making  this  estimate  are  taken 
from  the  annual  report  of  the  United  States  Commissioner  of 
Internal  Revenue  for  the  year  ending  June  30,  1914,  from  which 
we  conclude  that  the  amount  of  capital  stock  of  New  York 
corporations  subject  to  a  franchise  tax  on  said  stock  would  be 
about  $14,000,000,000.  At  present  we  receive  about  $3,500,000 
from  corporations  subject  to  a  franchise  tax  on  capital  stock, 
the  remainder  being  derived  from  a  franchise  tax  on  gross 
earnings,  insurance  premiums,  and  on  trust  companies,  savings 
banks,  etc.  We  also  estimate  from  the  figures  presented  in  the 
same  report  that  the  bonded  indebtedness  of  these  corporations 
would  be  about  $7,000,000,000,  which  would  produce,  together 
with  the  franchise  tax  on  capital  stock,  an  additional  tax  in  the 
aggregate  of  over  $12,000,000.  If  in  addition  to  all  this,  section 


332 


SELECTED   ARTICLES 


12  of  the  Tax  Law  were  repealed,  the  corporations  thereby 
being  relieved  from  local  taxation  on  personal  property,  and 
an  additional  three-quarters  of  a  mill  be  added  to  the  tax  to 
supply  this  deficiency,  there  would  be  returned  to  the  localities 
more  than  enough  to  repair  the  loss. 

Apportionment  of  Taxes 

We  have  already  intimated  that  there  is  not  a  sufficient  cor- 
relation in  the  system  of  indirect  taxation  between  the  state 
and  localities.  True,  the  mortgage  tax  and  excise  tax  are  appor- 
tioned between  the  state  and  localities,  but  this  same  principle 
should  be  extended  to  the  stock  transfer  tax,  the  motor  vehicle 
tax  and  the  inheritance  tax,  and  if  section  12  of  the  Tax  Law 
is  abolished  and  the  franchise  tax  extended,  there  should  be 
an  apportionment  of  the  state  corporation  tax  as  well.  In  this 
way  only  can  the  state  compensate  the  localities  for  the  taxes 
taken  away  from  local  assessors  and  brought  under  state  juris- 
diction. 

Proposed  Amendment    to    Transfer   Tax  Law 

Three  years  of  practical  experience  under  the  amended  Trans- 
fer Tax  Law  (Inheritance  Tax  Law)  has  shown  that  the  ex- 
pected increase  in  taxation  by  the  progressive  rates  provided  in 
that  statute  have  not  produced  the  anticipated  results.  The 
Comptroller  in  his  1915  annual  report  makes  the  following  state- 
ments : 

.  .  .  The  present  law  has  been  in  force  since  July  21,  1911,  and 
sufficient  time  has  elapsed  to  show  that  the  normal  annual  income  there- 
from is  between  $7,000,000  and  $9,000,000,  which  the  Comptroller  is  in- 
formed is  less  than  one-half  of  the  income  the  present  statute  was  ex- 
pected to  produce.  For  the  purpose  of  comparison  the  following  table 
shows  the  number  of  estates  paying  a  *ax  within  certain  stated  amounts 
during  the  past  three  years,  from  which  it  will  be  seen  that  there  is  only 
a  slight  variation  in  the  number  of  estates  paying  a  tax  each  year  within 
the  limitations  set  forth  at  the  head  of  each  column: 


Estates 
Faying 
Tax 

$10,000 
to 
$20,000 

$20,000 
to 
$50,000 

$50,000 
to 
$100,000 

$100,000 
to 
$500,000 

Over 

$500,000 

Total 
Estates 

Aggregate 
tax  paid  by 
these  estates 

1913   

61 

50 

15 

4 

2 

132 

$10  546  461  66 

1914 

69 

45 

13 

15 

1 

143 

9  282  193  97 

1915 

60 

46 

18 

14 

o 

138 

5  85^  097  51 

TAXATION  333 

It  is  true  that  the  sum  of  $12,724,236.86  was  received  in  1913  and 
$11,162,472.40  in  1914  from  this  source  of  revenue,  but  two  estates  paid 
taxes  aggregating  $5,561,202.56  in  1913,  and  one  estate  paid  a  tax  of 
$2,584,000.00  in  1914,  while  this  year  but  one  estate  paid  a  tax  as  high 
as  $395,094.06. 

The  small  percentage  of  estates  subject  to  the  graded  rates  of  tax, 
as  shown  by  the  appraisals  for  the  past  two  years,  justifies  me  in  calling 
to  your  attention  the  necessity  of  reducing  both  the  exemptions  allowed 
on  individual  transfers,  as  well  as  the  several  limitations  beyond  which 
the  next  higher  rate  of  tax  becomes  effective,  if  the  state  is  to  receive 
annually  from  this  source  of  revenue  the  amount  of  tax  that  the  present 
statute  was  expected  to  produce. 


Owing  to  the  present  large  exemptions  almost  every  estate  between 
$10,000  and  $30,000  where  the  property  passes  to  those  in  the  i  per  cent 
class  is  wholly  exempt.  This  amendment  eliminates  from  25  to  40  per 
cent  of  the  estates  in  most  of  the  counties  of  the  state  which  under  the 
old  law  would  have  been  taxable. 

We  recommend,  therefore,  that  the  inheritance  or  transfer 
tax  as  it  is  called  be  amended  in  accordance  with  the  last  report 
of  the  State  Comptroller  so  that  the  exemptions  of  $5,000  under 
section  221  of  the  Tax  Law  apply  only  to  father,  mother,  wife, 
widow  or  minor  child,  and  the  progressive  rates  be  regarded  in 
accordance  with  the  suggestions  made  in  that  report,  viz.,  so  that 
the 

1  per  cent  be  limited  to  individual  transfers  of  $25,000, 

2  per  cent  to  the  next  $75,000, 

3  per  cent  to  the  next  $100,000, 

4  per  cent  over  $200,000, 

and  also  that  the  rates  to  collateral  relatives  and  strangers  be  re- 
graded  in  accordance  with  said  report;  and,  further,  that  a  tax 
be  imposed  on  estates  of  non-residents,  such  as  existed  prior  to 
1911.  It  is  believed  that  these  amendments,  which  have  been 
suggested  by  the  experience  of  the  Transfer  Tax  Bureau  in  the 
last  three  years,  would  bring  in  additional  revenue  of  about 
$5,000,000  annually. 

Non-Resident  Estates 

It  will  be  noted  that  our  recommendations  as  to  the  tax  on 
non-resident  estates  is  limited  to  property  having  an  actual  situs 
within  the  state,  and  to  sums  invested  or  capital  employed 
within  the  state.  The  courts  of  this  state  have  clearly  defined, 
both  in  relation  to  local  taxation  as  well  as  to  the  state  fran- 
chise tax,  what  is  meant  by  these  terms,  and  the  suggested  amend- 
ments are  therefore  not  at  all  theoretical,  but  can  be  safely 


334  SELECTED   ARTICLES 

followed  in  practice.  In  this  respect  we  are  steering  a  middle 
course  between  the  recommendations  of  the  State  Comptroller, 
who  would  tax  all  property  of  non-residents  within  the  state 
whether  here  temporarily  or  not,  and  the  recommendations  of 
our  colleagues  in  the  majority  report,  that  would  leave  the  law 
as  to  non-residents  in  its  present  shape.  We  believe  that  much 
injustice  has  been  done  in  the  past  by  taxing  all  the  property 
of  non-residents  irrespective  of  whether  it  was  employed  in  the 
state  or  not,  and  irrespective  of  whether  it  had  a  situs  here.  In 
many  instances  bank  accounts  belonging  to  the  estates  of  non- 
residents were  taxed  under  the  old  law  although  such  accounts 
were  only  here  a  few  days  at  the  time  of  the  death  of  the  testator 
or  intestate.  The  result  was  that  many  large  deposits  were  with- 
drawn from  the  banks  of  this  state  and  re-deposited  in  the  insti- 
tutions of  neighboring  states. 

Exemptions  from  Taxation  to  be  Limited 

Exemptions  from  taxation  are  rapidly  becoming  a  huge  and 
increasing  item  and  the  subject  deserves  the  serious  attention  of 
the  Legislature.  In  1907  the  total  exemptions  in  the  City  of  New 
York  aggregated  over  $1,156,000,000,  and  the  total  assessed  valu- 
ation was  a  little  over  $6,000,000,000.  In  1914  the  total  exemp- 
tions were  nearly  $1,874,000,000,  and  the  total  assessed  valuation 
was  a  little  over  $8,400,000,000,  or  a  little  more  than  22  per  cent. 
Of  the  $1,874,000,000  of  exempt  property  in  1914  over 
$1,423,000,000  consisted  of  city  property,  and  about  one-half  of 
this  amount  consisted  of  public  parks  and  play  grounds.  The 
federal  property  consisted  of  a  little  over  $66,000,000,  which 
showed  a  decrease  from  previous  exemptions.  The  property  of 
the  state  amounted  to  $3,208,000  and  also  showed  a  decrease. 
Of  the  total  amount  of  exempt  property  in  the  City  of  New  York 
$371,000,000  belongs  to  religious  institutions,  asylums,  hospitals, 
private  colleges,  schools,  cemeteries  and  other  private  corpora- 
tions. There  is  no  power  in  the  state  government  to  tax  the 
property  of  the  Federal  government,  and  to  tax  state  or  city  prop- 
erty would  simply  mean  taking  it  out  of  one  pocket  and  putting 
it  into  another;  therefore  our  efforts  in  limiting  exemptions 
must  be  directed  to  private  exemptions  under  the  general  laws. 
The  present  easy  method  of  exempting  all  sorts  of  institutions, 
associations  and  organizations,  irrespective  of  whether  the  build- 
ings belonging  to  them  are  used  for  charitable,  religious  or 


TAXATION  335 

educational  purposes  has  been  subjected  to  great  abuse,  and  we 
think  the  only  effectual  way  to  deal  with  it  is  by  constitutional 
amendment,  such  as  that  proposed  by  the  recent  constitutional 
convention,  requiring  a  two-thirds  vote  of  all  the  members 
elected  to  both  houses  before  private  property  could  be  with- 
drawn from  general  taxation.  We  believe  that  if  this  amend- 
ment were  submitted  to  the  people  in  a  separate  measure  there 
would  be  no  difficulty  in  securing  the  passage  thereof.  A  mere 
statutory  amendment  would  not  bind  any  future  Legislature  and 
would  not  have  any  permanent  effect. 

Habitation  or  Occupation  Tax 

We  have  said  nothing  about  the  habitation  tax  or  occupation 
tax,  which  would  probably  work  well  in  its  administrative  fea- 
tures applied  to  metropolitan  centers.  The  weak  feature  of  this 
tax,  we  think,  would  arise  from  the  fact  that  it  would  be  an 
additional  burden  on  real  estate,  and  would  perhaps,  if  it  were 
at  all  onerous,  drive  tenants  from  the  cities  of  the  state  to  the 
suburbs  where  they  would  not  be  subject  to  such  tax. 

We  do  think  it  would  be  infinitely  preferable  to  the  personal 
property  tax  on  individuals,  and  that  it  would  probably  work 
well  for  cities  of  the  first  and  second  class,  provided  that  the 
application  of  the  habitation  tax  were  limited  on  the  one  end  to 
the  well-to-do  at  a  low  rate,  and  graded  upward  at  a  very  mod- 
erate progressive  rate  so  as  not  to  drive  any  one  out  of  the  state. 
We  believe,  however,  that  this  change  in  tax  legislation  should 
await  the  more  important  state-wide  remedies  that  we  have  other- 
wise suggested. 

We  oppose  that  part  of  the  habitation  or  occupation  tax 
scheme  known  as  the  salaries  tax,  on  the  ground  that  it  is  wrong 
economically  and  doubtful  in  its  legality.  The  intent  of  this  part 
of  the  plan  of  taxation  was  to  reach  the  non-resident  salaried 
class  who  have  no  habitation  or  place  of  business  in  the  state, 
but  who  derive  large  salaries  from  employment  in  the  state. 
Economically  this  is  based  on  the  very  narrow  view  that  the 
employee  as  well  as  the  employer  should  pay  a  tax,  although 
the  employer,  it  will  be  assumed,  has  already  paid  the  occupation 
tax,  and  the  salaried  non-resident  indirectly  contributes  more  to 
the  state  in  what  he  spends  than  any  impost  that  might  be  ex- 
acted from  him.  While  we  have  not  had  time  to  examine  the 
legal  question  of  taxing  salaries  of  non-residents  employed  here, 


336  SELECTED    ARTICLES 

we  believe  that  there  is  grave  doubt  whether  such  a  tax  limiting 
the  rights  of  a  non-resident  to  sell  his  services  within  the  state 
would  not  be  contrary  to  the  Constitution  of  the  United  States. 

Special  Franchise  Tax 

We  regret  that  the  time  of  the  committee  did  not  permit  a 
study  of  the  special  franchise  tax  which,  in  our  opinion,  is  a 
fruitful  field  for  much  needed  improvement.  Increasing  taxes 
upon  public  service  corporations  must  ultimately  be  reflected  in 
the  rates  for  service  to  the  public.  Under  the  court  decisions  in 
special  franchise  tax  cases  the  intricacy  of  correct  assessment 
is  a  serious  matter  for  tax  administrators.  The  basis  of  net 
earnings,  approved  by  the  court,  leaves  an  open  door  for  dif- 
ferences between  the  corporations  and  the  State  Tax  Commis- 
sion resulting  in  much  litigation.  A  thorough  study  of  this  sub- 
ject might  be  productive  of  more  scientific  methods  of  assess- 
ment. Taxes  upon  gross  earnings  at  rates  varying  according  to 
the  nature  of  the  public  service  operation  on  the  one  hand,  and 
further  classified  upon  the  relation  of  the  gross  receipts  from  all 
sources  to  legitimate  operating  expenses  determined  by  the  Pub- 
lic Service  Commissions  are  worthy  of  thorough  investigation 
and  study. 


TAXATION  IN  OKLAHOMA  * 

During  the  current  year  the  state  of  Oklahoma,  including  its 
various  subdivisions,  will  expend  for  maintenance  of  govern- 
ment, including  public  expenditures  for  education,  for  internal 
improvement,  and  interest  on  public  debt,  approximately 
$32,000,000.  A  little  more  than  $29,000,000  of  this  will  be  raised 
by  taxation,  the  remainder  being  derived  from  interest  on  our 
permanent  educational  fund  and  from  our  public  building  fund. 
Some  $23,500,000  of  this  will  be  raised  by  the  direct  ad  valorem 
property  tax,  and  about  $3,500,000  will  be  secured  from  the  tax 
upon  oil  and  gas  production;  nearly  $1,000,000  from  the  auto- 
mobile tax;  probably  $500,000  or  more  from  the  income  tax, 
and  the  remainder  from  corporation  charter  fees,  annual  license 
taxes,  mortgage  filing  fees,  inheritance  taxes,  the  tax  upon 

1  By  Campbell  Russell.  Proceedings  Eleventh  Annual  Conference  Na- 
tional Tax  Association.  1017.  p.  50-5. 


TAXATION  337 

insurance  companies,  and  small  sums  from  various  other  sources 
that  are  of  little  concern  to  this  conference. 

Oklahoma  was  among  the  first  states  to  enact  income  and 
inheritance  tax  laws,  yet  after  a  ten  years'  trial  they  are  still 
of  comparatively  little  importance  as  revenue  producers.  Less 
than  */2  of  i  per  cent  of  the  taxes  collected  in  our  state  since 
these  laws  were  enacted  has  been  derived  from  the  income  and 
inheritance  taxes  combined.  So  far  as  actual  results  are  con- 
cerned, we  still  rely  almost  wholly  upon  the  direct  property  tax, 
designed  to  apply  as  uniformly  as  practicable  to  all  classes  of 
property. 

We  note  that  the  entire  net  income  from  all  sources  is  subject 
to  this  tax;  also  that  this  tax  shall  apply  to  all  incomes  derived 
from  property  owned,  and  from  every  business,  trade,  or  pro 
fession  carried  on  in  this  state  by  persons  living  elsewhere. 
Under  this  law  the  1915  tax  collected  to  date  is  slightly  over 
$250,000,  and  the  1916  tax  collected  is  a  little  more  than  $400,000. 
The  increased  collection  is  partly  to  be  attributed  to  the  fact 
that  until  the  last  legislature  met  there  was  no  appropriation 
that  the  state  auditor  could  use  to  pay  expenses  incurred  in 
this  work.  The  difficulty  in  collecting  this  tax  has  been  greatly 
increased  by  the  fact  that  for  six  years  we  had  on  our  statute 
books  an  income  tax  law  so  viciously  unjust  in  its  provisions 
that  practically  no  attempt  at  enforcement  was  made,  and  the 
public  has  been  trained  to  consider  the  state  income  tax  as 
largely  a  donation  or  free  will  offering  to  the  state.  A  very 
large  majority  of  our  people  agree  that  the  net  income  tax  law 
enacted  in  1915  is  just  and  equitable  and  should  be  enforced. 
The  last  legislature  appropriated  $5,ooo,  payable  annually,  to  be 
used  for  this  purpose  and  no  complaint  is  heard  from  any  source 
that  the  state  auditor  has  in  any  way  neglected  his  duty  in  this 
matter;  yet  a  few  figures  will  show  the  remarkably  small  per 
cent  of  this  tax  actually  paid,  although  the  1916  tax  is  now 
long  overdue.  Clearly  no  additional  collections  are  to  be  ex- 
pected where  payment  of  same  can  be  avoided. 

The  personal  income  tax  collected  by  the  Federal  government 
from  Oklahoma  citizens  for  the  year  1916  was  $4,428,000.  As- 
suming that  an  equal  amount  of  this  was  collected  from  each 
of  the  fourteen  steps  in  the  Federal  classifications,  and  then 
applying  to  the  incomes  shown  to  have  been  received  in  each 
class  the  income  tax  rate  of  the  state  applicable  to  each  portion, 


338  SELECTED    ARTICLES 

we  find  the  state  should  have  collected  from  these  same  indi- 
viduals upon  these  same  incomes  the  sum  of  $2,627,572.  In 
addition  to  this,  millions  of  dollars  of  Federal  income  tax  were 
collected  from  incomes  upon  property  owned  and  business  done 
in  Oklahoma  by  persons  living  elsewhere.  These  collections 
are  not  credited  to  Oklahoma  and  are  not  included  in  the 
$4,428,000  above  set  out.  Under  the  state  law  these  incomes 
are  taxable  in  Oklahoma.  No  one  can  do  more  than  estimate 
what  this  tax,  if  collected,  would  amount  to;  but  inasmuch  as  a 
large  majority  of  our  oil  properties  are  owned  outside  the  state, 
and  that  a  very  large  proportion  of  our  income  taxes  are  secured 
from  this  class  of  business,  it  is  not  an  unreasonable  estimate 
to  say  that  the  tax  from  this  source  should  equal  the  amount 
that  as  is  shown  above  should  have  been  paid  by  citizens  of  the 
state;  but  if  we  include  only  one-half  of  this  amount,  or  $1,313,- 
786,  we  show  $3,941,358  as  the  sum  which  the  state  should  have 
collected  for  the  year  1916  upon  personal  incomes,  exclusive  of 
the  incomes  received  as  dividends  upon  corporation  stock,  the 
Federal  income  tax  upon  which  was  collected  at  the  source. 
Oklahoma  has  no  corporation  income  tax,  so  that  no  one  is 
entitled  to  any  reduction  on  his  state  income  tax  for  taxes  col- 
lected at  the  source.  Personal  income  taxes  paid  to  the  state 
would  in  many  instances  be  largely  increased  by  the  addition 
to  the  taxable  income  of  the  dividends  from  corporation  stock, 
the  Federal  tax  upon  which  has  been  collected  at  the  source. 
All  things  considered,  $4,500,000  to  $5,000,000  is  a  conservative 
estimate  of  the  amount  of  income  tax  due  the  state  of  Oklahoma 
for  the  year  1916.  Less  than  10  per  cent  of  this  amount  has 
been  collected. 

Oklahoma  has  collected  only  a  few  thousand  dollars  in  in- 
come tax  from  persons  residing  outside  our  state  and  this  pro- 
vision of  our  law  is  now  being  vigorously  contested  in  the 
Federal  court  by  a  citizen  of  Illinois  whose  income  tax  (as  per 
statement  rendered  by  him)  due  Oklahoma  for  the  year  1916 
is  over  $76,000.  This  case  (testing  the  constitutionality  of  this 
feature  of  our  law)  was  heard  before  three  district  Federal 
judges  in  Oklahoma  City  two  weeks  ago,  and  will  doubtless  go 
to  the  Supreme  Court  of  the  United  States.  It  seems  not  un- 
reasonable to  anticipate  that  the  government  that  collects  a  tax 
upon  the  incomes  derived  from  all  property  owned  or  business 
done  within  its  jurisdiction,  regardless  of  the  citizenship  or 


TAXATION  339 

residence  of  the  owner,  will  probably  sustain  the  right  of  each 
state  to  collect  a  tax  upon  incomes  derived  from  property  and 
business  within  the  state,  although  the  owner  may  live  else- 
where. 

Our  1917  legislature  placed  our  income  tax  rate  on  the 
reverse  gear,  reducing  the  rate  on  the  smaller  incomes  25  per 
cent;  next  step,  33^  per  cent  reduction;  next,  50  per  cent 
reduction,  and  the  rate  on  incomes  above  $100,000  was  reduced 
60  per  cent — from  5  per  cent  to  2  per  cent,  which  is  now  our 
maximum  rate.  The  argument  advanced  to  secure  this  reduction 
was  not,  in  the  main,  that  the  rate  was  unjust,  but  that  the 
reduction  was  necessary  in  order  to  prevent  our  rich  men  from 
removing  their  residences  from  our  state — assuming  that  thereby 
they  could  escape  our  state  income  tax,  while  still  enjoying  the 
profits  from  the  property  owned  and  business  carried  on  within 
the  state.  Until  our  right  to  collect  an  income  tax  from  persons 
living  without  our  jurisdiction  has  been  finally  determined,  it 
is  hardly  proper  to  include  the  possible  collections  from  that 
source  in  estimating  the  per  cent  of  the  tax  actually  due  which 
has  not  been  collected ;  but  considering  only  the  amount  unques- 
tionably due  from  citizens  of  Oklahoma,  not  more  than  15  or 
16  per  cent  of  the  1916  tax  has  been  paid.  The  remedy  is  con- 
tained in  one  word,  publicity.  So  long  as  the  tax  collector 
must  play  hide-and-seek  in  the  dark  with  an  unwilling  tax- 
payer and  must  keep  secret  what  he  does  discover,  we  may 
reasonably  anticipate  that  results  will  continue  to  fall  far  below 
expectations.  Personally,  I  see  no  good  reason  why  incomes 
should  be  kept  secret.  The  man  who  is  able  to  secure  a  large 
income,  if  it  be  secured  through  honest  endeavor,  should  not 
be  ashamed  of  that  fact.  However,  unless  the  necessities  of 
war  shall  change  the  policy  of  the  Federal  government,  we  may 
expect  the  veil  of  secrecy  to  continue  to  screen  the  income  tax- 
payer (and  the  income  tax-dodger  as  well)  from  the  public  view. 
It  is  probable  that  through  concerted  efforts  upon  the  part  of 
interested  states  the  Federal  authorities  may  relax  their  rules 
sufficiently  to  permit  the  proper  taxing  authorities  of  a  state  to 
inspect  the  federal  income  tax  records  covering  that  state. 

The  income  tax  collected  by  Oklahoma  for  the  year  1916 
exceeds  the  combined  collections  of  the  o.ther  seven  years,  yet 
the  collections  for  that  year  do  not  exceed  1.5  per  cent  of  the 
total  tax  collected  in  the  state  for  such  year;  these  things 


340  SELECTED  ARTICLES 

indicate  somewhat  the  immensity  of  the  tax  problem.  Taxation 
has  long  been  and  to  the  end  of  time  will  be  one  of  the  most 
difficult  problems  connected  with  human  government. 


MINORITY  REPORT  ASSESSMENT  AND  TAXA- 
TION COMMISSION  OF  LOUISIANA1 

The  Commission  is  hopelessly  divided  on  the  question  of  sur- 
taxes and  excess  profit  taxes,  the  vote  being  five  in  favor  of 
surtaxes  and  excess  profit  taxes,  and  four  against. 

A  long  argument  was  made  before  the  Commission  that  the 
taxes  should  be  levied  according  to  a  man's  ability  to  pay  in- 
stead of  such  tax  being  proportioned  to  his  duty  to  pay.  With- 
out discussing  the  entire  report  it  is  sufficient  to  quote  the  fol- 
lowing astonishing  statement  which,  if  our  recollection  does  not 
deceive  us,  was  read  with  approval  by  the  majority  of  the  Com- 
mission and  inserted  by  the  Chairman  and  was  adopted  over  the 
protest  of  the  minority. 

A  study  of  the  returns  under  income  tax  laws  conclusively  shows 
that  the  income  tax  is  a  tax  on  the  rich  and  well-to-do.  The  liberal 
exemptions  allowed  by  the  Federal  law  exclude  the  great  bulk  of  the 
population  from  its  operation. 

According  to  the  report  of  the  Internal  Revenue  Department  only 
about  y%  of  i  per  cent  of  the  population  is  subject  to  the  tax. 

In  Wisconsin  with  lower  exemptions,  less  than  3  per  cent  of  the 
population  come  within  the  law,  etc. 

Lyons  on  Income  Taxes,    p.  43. 

Therefore,  without  going  any  further,  the  majority  of  the 
commission  can  be  understood  as  favoring  surtaxes  and  excess 
profit  tax,  or,  as  the  majority  seem  to  prefer  to  designate  them, 
graduated  income  taxes,  because: 

1.  They  are  a  tax  on  the  rich  and  well-to-do. 

2.  Because  they  exclude  the  great  bulk  of  the  population 
from  its  operation. 

3.  Because  under  the   Federal   Income  Tax    (a  tax  which 
should  not  once  be  considered,  because  it  was  levied  to  carry  the 
burdens  of  a  great  war)  only  ^  of  i  per  cent  of  the  population 
is  subject  to  the  tax. 

It  is  our  idea  of  democracy  that  the  burden  of  taxation 
should  not  be  put  upon  one  class  of  men  even  if  that  class  of 
men  happen  to  be  rich. 

1  Report  of  the  Louisiana  Assessment  and  Taxation  Commission  to 
the  Constitutional  Convention.  1921.  p.  55-6o. 


TAXATION  341 

It  is  not  our  idea  of  democracy  that  the  majority  of  the  citi- 
zens of  the  State  of  Louisiana  should  welch  [sic]  on  their  obli- 
gations to  the  state  and  allow  themselves  to  be  supported  by 
another  class  of  people. 

We  prefer  to  think  as  did  our  forefathers  that  there  was 
enough  manhood  in  every  citizen  of  the  state  for  each  to  bear 
his  share  of  the  burdens  of  the  government. 

We  believe  in  an  income  tax  because  we  believe  that  the  tax 
can  be  fairly  levied,  but  we  believe  that  it  should  be  at  the  same 
rate  for  every  citizen.  We  do  not  believe  in  heavy  exemptions 
because  if  we  are  going  to  exist  as  a  Republic  we  should  not  at- 
tempt unjustly  to  make  one  class  support  another.  We  prefer 
the  simplicity  of  fairness  and  justice  of  our  ancestors  who  had 
in  their  minds,  hearts  and  Constitutions  the  proportionate  bear- 
ing of  the  burdens  of  the  state. 

In  the  Constitution  of  1845,  the  following  Article  covered  the 
right  of  taxation. 

Taxation  shall  be  equal  and  uniform  throughout  the  state.  After  the 
year  1848,  all  property  on  which  taxes  may  be  levied  in  this  state  shall 
be  taxed  in  proportion  to  its  value  to  be  ascertained  as  directed  by  law. 
No  one  species  of  property  shall  be  taxed  higher  than  another  species  of 
property  of  equal  value  on  which  taxes  shall  be  levied. 

The  Legislature  shall  have  the  power  to  levy  an  income  tax  and  to 
tax  all  persons  pursuing  any  occupation,  trade  or  profession. 

The  same  article  was  substantially  embodied  in  the  Constitu- 
tion of  1852. 

We  still  believe  that  some  weight  should  be  given  to  the 
character  of  the  men  who  formulated  and  prepared  these  Con- 
stitutions for  the  state.  Among  these  men  can  be  mentioned 
Mazureau,  John  R.  Grymes,  Judah  P.  Benjamin,  Randall  Hunt, 
Pierre  Soule,  Christian  Roselius,  Claiborne  and  other  men  of 
like  standing,  whose  characters  stand  out  as  beacons  of  light 
guiding  to  freedom  and  fairness  in  the  conduct  of  government, 
who  believed  in  a  government  "of  the  people,  by  the  people  and 
for  the  people";  and  such  a  government  cannot  exist  where  l/2 
of  i  per  cent  of  the  population  pay  the  expenses  of  the  state. 

The  very  statement  of  this  proposition  will  carry  resentment 
to  every  thoughtful  citizen  of  the  state.  Not  only  will  it  be  in- 
jurious to  the  class  who  are  bearing  the  burden,  but  it  will  be 
more  injurious  to  the  men  who  are  avoiding  their  duties  as  citi- 
zens. What  kind  of  a  citizen  would  we  have  in  Louisiana  with 
such  principles  announced  in  the  Constitution? 

The  power  of  taxation  is  the  most  far  reaching  and  danger- 


342  SELECTED   ARTICLES 

ous  power  conferred  on  the  state  by  the  people.    As  Mr.  Justice 
Miller  has  said  in  the  case  of  Loan  Association  vs.  Topeka: 

Of  all  the  powers  conferred  upon  Government  that  of  taxation  is 
the  most  liable  to  abuse.  Given  a  purpose  or  object  for  which  taxation 
may  be  lawfully  used,  and  the  extent  of  its  exercise  is,  in  its  very  nature 
unlimited.  The  power  to  tax  is  therefore  the  strongest,  the  most  pervad- 
ing, of  all  the  powers  of  government,  reaching  directly  or  indirectly  to 
all  classes  of  people.  It  was  said  by  Mr.  Chief  Justice  Marshall,  in  the 
case  of  McCulloch  vs.  Maryland  that  the  power  to  tax  is  the  power  to 
destroy.  A  striking  instance  of  the  truth  of  that  proposition  is  seen 
in  the  fact  that  the  existing  tax  of  10  per  cent  imposed  by  the  United 
States  on  the  circulation  of  all  other  banks  than  the  national  banks  drove 
put  of  existence  every  state  bank  of  circulation  within  a  year  or  two  after 
its  passage.  This  power  can  as  readily  be  employed  against  one  class  of 
individuals  and  in  favor  of  another  so  as  to  ruin  the  one  class  and  give 
unlimited  wealth  and  prosperity  to  the  other,  if  there  is  no  implied  limita- 
tion of  the  uses  to  which  the  power  may  be  exercised. 

To  lay  with  one  hand  the  power  of  the  government  on  the  property 
of  the  citizen,  and  with  the  other  to  bestow  it  upon  favored  individuals 
to  aid  private  enterprises  and  build  up  private  fortunes,  is  none  the  less 
a  robbery  because  it  is  done  under  the  forms  of  law  and  is  called  taxa- 
tion. This  is  not  legislation.  It  is  a  decree  under  legislative  forms. 

Loan  Association  vs.  Topeka,  20  Wall,  655,  p.   663-664. 

Can  anything  be  stronger  than  the  following  sentence  in  the 
above  citation : 

This  power  can  as  readily  be  employed  against  one  class  of  individuals 
and  in  favor  of  another  so  as  to  ruin  the  one  class  and  give  unlimited 
wealth  and  prosperity  to  the  other,  if  there  is  no  implied  limitation  of  the 
uses  to  which  the  power  may  be  exercised. 

The  undersigned  therefore,  sincerely  hope  that  the  Consti- 
tutional Convention  will  not  be  led  into  adopting  any  such 
Article  as  the  majority  have  proposed. 

Respectfully  submitted, 
E.  T.  Merrick, 
J.  H.  Heinen, 
J.  R.  Perez, 
A.  M.  Smith. 


THE  INCOME  TAX  1 

Although  the  income  tax  appears  to  be  receiving  from  tax 
commissioners  little  serious  consideration  as  a  practical  method, 
it  is  deemed  pertinent  to  give  a  summary  of  the  conclusions  ar- 
rived at  by  Delos  O.  Kinsman  in  his  authoritative  work.  The 
Income  Tax  in  the  Commonwealths  of  the  United  States,  1903. 

1  Civic  Federation  of  Chicago.  A  summary  of  the  reports  of  Special 
State  Tax  Commissions.  1907^  P-  7l~4- 


TAXATION  343 

The  author  studied  the  income  tax  in  each  of  the  states 
employing  it,  dividing  its  history  into  two  periods :  "the  first, 
that  of  the  'faculty'  tax,  closed  about  1825.  It  was  characterized 
by  a  loose  method  of  determining  the  taxpayer's  ability,  the 
levy  being  made  upon  an  estimated  or  assumed  income  of 
of  the  individual.  The  second  period,  that  of  the  income  tax 
proper,  continuing  to  the  present  time,  has  been  characterized 
by  the  attempt  to  assess  and  tax  the  exact  income  of  the 
individual.  Our  study  is  concerned  principally  with  the  second 
period."  A  rapid  survey  of  the  first  period,  however,  paves 
the  way  for  a  more  detailed  consideration  of  the  second. 

After  an  examination  of  the  subject  by  states,  and  a  concise 
history  of  the  results  in  each,  Mr.  Kinsman  devotes  his  last 
chapter  to  a  resume,  from  which  enough  is  quoted  to  make  his 
findings  clear ; 

SYSTEM  EXTENSIVELY  TRIED 

We  shall  now  give  a  brief  resume  before  presenting  our  conclusion. 
We  cannot  charge  the  Commonwealths  with  slighting  the  income  tax.  Of 
the  forty-five  states,  sixteen  have  made  legislative  provision  for  it,  either 
in  a  general  or  special  form;  of  about  one  hundred  constitutions  passed 
by  the  states,  thirteen,  representing  eight  states,  have  made  special  pro- 
vision for  its  use;  and  of  some  forty  state  tax  commissions,  which  have 
been  appointed  by  the  different  states,  seven  have  treated  it  in  their  re- 
ports. 

The  use  of  the  income  tax  proper  began  about  1840  and  has  continued 
to  the  present  time.  Its  history  has  been  marked  by  three  periods  of 
special  activity;  one  from  about  1840  to  1850,  during  which  decade  six 
states  introduced  the  tax;  another  from  1860  to  1870,  during  which  decade 
seven  introduced  it;  and  a  third  from  about  1895  to  the  present,  which 
has  been  marked  by  a  revival  of  the  movement.  Of  the  sixteen  states 
that  have  employed  it,  six  are  still  using  it — Massachusetts,  Virginia,  North 
Carolina,  South  Carolina,  Louisiana,  and  Tennessee. 

Massachusetts  has  had  the  longest  experience  with  the  tax,  extending 
from  1643  to  the  present  time.  South  Carolina's  experience  began  in 
1701  and,  with  the  exception  of  about  thirty  years,  has  extended  to  the 
present.  Pennsylvania  levied  the  tax  from  1841  to  1871;  Maryland, 
from  1842  to  1850;  Virginia,  from  1843  to  the  present;  Alabama,  from 
1843  to  about  1886;  Florida,  from  1845  to  1855;  North  Carolina,  from 
1849  to  the  present  time.  With  but  one  exception  the  states  introducing 
the  tax  between  1860  and  1870  employed  it  for  only  very  short  periods. 
Missouri  employed  the  tax  from  1861  to  1866;  Texas,  from  1863  to  1868; 
Georgia  from  1863  to  1866;  West  Virginia  during  1863;  Louisiana,  the  one 
exception,  from  1865  to  the  present  time;  Kentucky,  from  1867  to  1872; 
Delaware,  from  1869  to  1872.  Tennessee  tried  the  tax  in  1883,  but  then, 
like  Kentucky,  only  to  a  very  limited  extent.  .  . 

METHODS  WIDELY  VARIED 

The  states  employing  the  tax  have  spared  neither  time  nor  ingenuity 
in  attempting  so  to  frame  the  laws  as  to  make  the  tax  erfective.  Every 
possible  method  has  been  tried.  The  tax  has  been  levied  as  a  general 
income  tax  upon  all  forms  of  income  and  as  a  special  income  tax  upon 
one  or  more  forms  of  income;  without  regard  to  the  source  of  the  income 
and  modified  according  to  the  source;  as  an  apportioned  tax,  and  as  a 
percentage  tax.  The  rate  has  been  made  proportional,  progressive,  and 


344  SELECTED   ARTICLES 

partly  proportional  and  partly  progressive.  The  exemption  has  been  a  fixed 
sum  applied  to  all  income  and  a  sum  varying  with  the  form  of  income 
and  with  particular  classes  of  individuals.  The  administration  of  the  law 
has  been  under  the  direct  supervision  of  the  central  government,  and  it 
has  been  left  to  the  option  of  the  local  units.  The  tax  has  been  em- 
ployed strictly  as  a  war  measure,  as  a  peace  measure,  and  as  both. 

Of  all  the  states  using  the  tax,  six  have  levied  it  as  a  general  income 
tax,  affecting  all  forms  of  income — rent,  interest,  wages,  and  profits. 
These  states  are  Massachusetts,  South  Carolina,  Virginia,  Alabama,  North 
Carolina,  and  Texas.  The  scope  of  the  tax  in  Massachusetts,  however, 
has  varied  with  the  different  local  interpretations  placed  upon  the  law. 
The  remaining  ten  states  have  each  taxed  some  one  or  more  of  the 
four  forms  of  income.  All  of  them  except  Georgia,  Tennessee,  and  Ken- 
tucky have  taxed  incomes  from  personal  services,  salaries  being  especially 
mentioned;  seven  of  them,  all  except  Florida,  Tennessee,  and  Kentucky, 
have  taxed  profits.  Five,  Delaware,  West  Virginia,  Kentucky,  Tennessee, 
and  Missouri,  have  taxed  interest.  The  rate  of  the  tax  has  usually  been 
proportional,  although  six  of  the  states  have  made  use  of  the  progressive 
rate. 

An  exemption  has  been  very  generally  allowed,  varying  both  in  the 
different  states  and  at  different  times  in  the  same  state.  When  a  fixed 
sum  has  been  allowed,  it  has  been  usually  from  $300  to  $2,500,  $500  and 
$1,000  being  the  most  common  amounts.  The  exemption  at  present  allowed 
in  South  Carolina  is  $2,500.  Many  of  the  states  have  provided  for 
special  exemptions,  such  as  the  expenses  of  the  business  from  which  the 
income  is  derived  and  the  incomes  of  particular  classes  of  individuals, 
such  as  ministers  of  the  gospel,  state  judges,  and  certain  classes  of 
laborers. 

The  administration  of  the  tax  has  been  much  the  same  in  all  the 
states.  It  has  been  assessed,  as  a  rule,  by  the  local  assessors  and  col- 
lected by  the  local  tax  collectors.  The  laws  have  required  that  the  tax 
should  be  levied  by  self-assessment,  almost  invariably  under  the  severe 
penalties  for  failure  to  comply. 

REVENUE  INSIGNIFICANT 

The  revenue  derived  from  the  income  tax  has  been  insignificantly 
small.  For  instance,  Alabama  in  1882,  during  the  period  of  her  most 
successful  experience,  received  an  income  tax  of  only  $22,116,  out  of  a 
state  tax  of  over  $600,000.  In  1899  North  Carolina's  income  tax  amounted 
to  only  $4,399  out  of  a  total  tax  of  $723,307.  Virginia  in  1899  received 
only  $54,565  from  this  source,  while  her  state  tax  amounted  to  $2,132,368. 
South  Carolina  in  1898,  while  levying  a  state  tax  of  about  $1,000,000, 
received  only  $5,190  from  her  tax  upon  incomes. 

The  attitude  of  the  State  courts  toward  the  income  tax  has  been  one 
of  sympathy.  In  the  few  cases  upon  the  subject  brought  before  them 
they  have  upheld  the  tax.  Had  all  forces  been  as  active  in  support 
of  the  system  as  the  state  courts,  the  tax  would  undoubtedly  have  been 
a  success.  .  . 

PRONOUNCED  A   FAILURE 

The  experience  of  the  states  with  the  income  tax  warrants  the  con- 
clusion that  the  tax,  as  employed  by  them,  has  been  unquestionably  a 
failure.  It  has  satisfied  neither  the  demands  for  justice  nor  the  need 
of  revenue.  The  question  arises:  Is  this  failure  due  to  qualities  inherent 
in  the  nature  of  the  tax,  or  is  it  the  result  of  conditions  which  may 
be  removed?  One  of  the  fundamental  principles  of  taxation  is  that  the 
subjects  of  a  state  ought  to  contribute  to  the  support  of  the  government 
in  proportion  to  their  respective  abilities,  and  it  is  generally  agreed  that 
these  abilities  are  best  measured  by  income.  Therefore,  theoretically  at 
least,  an  income  tax  is  unquestionably  the  fairest  system  yet  proposed, 
h'ou^hout  the  history  of  the  tax  in  the  several  states,  the  opposition 
has  never  seriously  attacked  it  from  a  theoretical  standpoint. 

If  the  failure  is  to  be  attributed  to  the  application  of  the  principle, 
either  the  laws  have  failed  to  embody  this  principle  properly,  or  the 


TAXATION  345 

administration  has  been  ineffective.  While  much  of  the  legislation  in 
the  states  relative  to  the  income  tax  has  been  very  satisfactory,  .  .  . 
nevertheless  laws  have  been  passed  repeatedly  which,  if  properly  admin- 
istered, would  have  distributed  the  burdens  with  unusual  justice.  But 
these  laws  have  failed  quite  as  completely  as  those  with  provisions  less 
satisfactory.  The  failure  of  the  tax,  therefore,  cannot  have  been  due 
to  the  ill  success  of  the  laws  in  embodying  the  principle. 

A  careful  study  of  the  history  of  the  tax  leads  one  to  the  conclusion 
that  the  failure  has  been  due  to  the  administration  of  the  law. 

SELF-ASSESSMENT   ALWAYS    INEFFECTIVE 

Although  the  laws  have  usually  required  the  assessors  to  demand 
from  each  taxpayer  a  full  statement  of  his  income  and  to  enforce  their 
demand  by  a  severe  penalty,  they  have  not  only  failed  to  do  this,  but 
in  listing  the  individual's  property  have  also  entirely  neglected  his  in- 
come or  assessed  it  so  low  as  to  make  the  tax  derived  therefrom  unim- 
portant. Before  we  can  hope  for  a  successful  taxation  of  incomes,  officials 
must  be  faithful  in  the  performance  of  their  duty. 

Not  a  little  in  the  way  of  changing  the  attitude  of  the  taxpayer 
toward  the  income  tax  may  be  done  by  a  more  careful  framing  of  the 
laws,  so  that  they  will  better  appeal  to  his  sense  of  justice.  .  . 

The  English  income  tax  has  been  satisfactory  only  where  assessment 
at  the  source  has  been  employed;  where  it  has  been  necessary  to  rely  on 
self-assessment,  as  it  has  been  in  one  or  two  classes,  the  tax  has  been  a 
failure.  The  State  of  Pennsylvania  also  has  employed  the  method  of 
assessing  income  at  its  source  with  marked  success. 

The  extent  to  which  this  method  of  assessment  could  be  applied  to 
general  incomes  in  this  country  is  uncertain.  The  Massachusetts  tax 
commission  of  1897  considered  it  practically  impossible.  With  our  present 
industrial  organization,  much  income  is  derived  from  sources  not  acces- 
sible and  consequently  determinable  only  by  the  method  of  self-assessment. 
Indeed,  it  would  often  be  very  difficult  for  the  taxpayer  himself  to  de- 
termine the  exact  amount  of  his  income;  especially  is  this  true  of  the 
agricultural  classes  and,  indeed,  of  a  large  portion  of  the  business  and 
professional  classes.  In  England  industry  is  carried  on  in  such  a  way 
that  three-fourths  of  the  income  can  be  taxed  with  no  question  or  demand 
of  the  individual  taxpayer;  this  would  be  impossible  in  our  states.  While 
the  method  of  assessment  at  the  source  can  be  applied  to  a  few  forms 
of  income,  and  in  so  far  as  it  is  possible  to  do  so  the  income  tax  would 
be  successful,  still  we  must  also  say  that  with  our  present  system  of  in- 
dustry the  method  could  not  be  applied  by  our  states  to  a  large  part  of 
the  income  received  and  that,  therefore,  a  general  state  income  tax  must 
be  a  failure. 


BRIEF  EXCERPTS 

There  is  no  demurrer  to  the  verdict  that  the  state  income  tax, 
as  it  exists  (1889)  in  three  commonwealths  (Virginia,  Massa- 
chusetts, and  North  Carolina)  is  a  mockery.  Winthrop  M. 
Daniels.  The  Elements  of  Public  Finance,  p.  191. 

A  federal  [i.e.  national  and  state]  income  tax  system  neces- 
sarily involves  multiple  taxation  on  one  and  the  same  income, 
person,  and  property.  David  A.  Wells.  Theory  and  Practice  of 
Taxation,  p.  533. 


346  SELECTED   ARTICLES 

A  state  income  tax  would  work  just  as  badly  as,  and  in  our 
opinion  even  more  badly  than,  the  present  personal  property 
tax.  The  real  difficulty  in  the  one  case  as  in  the  other,  is  not 
with  administrative  methods,  but  with  the  inherent  impossibility 
of  localizing  personalty  or  income.  Edwin  R.  A.  Seligman. 
The  Income  Tax.  p.  428. 

In  the  United  States  income  taxes  have  been  employed  by 
both  the  state  and  Federal  governments.  Altogether  some  six- 
teen states  have  imposed  this  tax  at  some  period  of  their  his- 
tory, but  of  these  only  six  continued  to  use  it  January  I,  1903. 
The  principal  defect  in  the  tax  as  a  state  tax  is  that  it  is  im- 
possible to  assess  it  fairly  and  that  when  it  is  imposed  it  has 
a  tendency  to  drive  persons  with  large  incomes  into  other 
states  where  no  such  tax  is  found.  It  seems  clear  from  Amer- 
ican experience  that  such  a  tax  must  be  national  in  its  scope, 
if  it  is  to  be  even  approximately  just  in  its  practical  operation. 
Henry  R.  Seager.  Introduction  to  Economics,  p.  574. 

A  man  may  live  in  one  state  and  may  secure  his  income  partly 
from  real  estate  holdings  situated  in  another  state  and  partly 
from  investments  in  securities  of  corporations  whose  earnings 
are  derived  in  many  other  states.  How  is  it  possible  for  any 
local  or  state  administration  successfully  to  ascertain  or  ade- 
quately to  control  such  income  of  its  resident  citizens?  Most 
of  the  state  income  taxes  in  the  United  States  are,  largely  for 
that  reason,  the  veriest  farces,  and  under  present  economic  con- 
ditions are  not  likely  ever  to  become  thoroughly  successful. 
Edwin  R.  A.  Seligman.  Essays  in  Taxation.  Eighth  edition. 
1913.  p.  383. 

The  federal  government  has  now  added  the  income  tax  to 
its  fiscal  system.  This  tax  is  in  all  probability  to  be  a  permanent 
feature  of  our  financial  system.  And  the  states  will,  with  the 
further  example  of  Wisconsin's  success  with  a  state  income 
tax  before  their  eyes,  soon  look  to  this  form  of  tax  as  offering 
a  practicable  remedy  for  the  evils  of  the  personal  property  tax. 
The  commissioner  of  internal  revenue  has  all  the  administrative 
machinery  necessary  for  determining  the  size  of  the  individual 
taxpayer's  income.  Why  should  this  costly  machinery  be 
duplicated?  Already  the  states'  tax  commissions,  boards  of 


TAXATION  347 

equalization,  and  other  administrative  machinery  are  high  in 
cost,  and  low  in  efficiency.  More  simplification  and  less  duplica- 
tion are  needed.  And  this  means  more  cooperation.  James 
E.  Boyle.  Annals  of  the  American  Academy.  58:63.  March 


The  income  tax,  so  far,  has  been  a  failure  in  every  state 
that  has  adopted  it.  The  main  reason  lies  on  the  surface.  The 
only  way  an  income  tax  can  be  satisfactorily  enforced  in  this 
country  is  by  taxing  the  income  at  its  source,  on  the  English 
plan  ;  and  no  state  has  power  to  do  that.  A  citizen  of  Wis- 
consin, for  example,  may  derive  a  large  income  from  steel 
stock  or  New  York  Central  bonds.  If  he  pays  a  state  tax  on 
that  income  it  will  be  because  he  chooses  to.  The  state  cannot 
compel  a  corporation  of  New  Jersey  or  New  York  to  disclose 
the  dividends  and  interest  it  disburses  in  Wisconsin.  Or  a 
Wisconsin  capitalist  may  escape  the  tax  by  the  simple  expedient 
of  taking  up  residence  across  the  state  border.  Most  of  the 
larger  corporations  operate  in  many  states  and,  to  avoid  an 
income  tax  in  Wisconsin,  can  reincorporate  elsewhere.  A  num- 
ber of  corporation  removals  have  been  reported  already.  Satur- 
day Evening  Post.  184:22.  June  15,  1912. 

I  omitted  the  income  tax  because  I  refer  to  income  tax  as 
entirely  unsuited  for  state  revenue.  It  is  practicable,  in  my 
judgment,  constitutional  objections  aside,  to  use  the  income  tax 
for  Federal  revenue.  The  tendency  of  it  is  to  tax  income  at 
source.  That  means  that  in  every  corporation  which  pays  interest 
on  debt,  and  dividends  on  its  stocks,  you  must  retain  a  percentage 
of  the  dividends  and  the  interest  and  turn  it  over  to  the  state. 
I  need  not  elaborate  on  the  methods  of  reaching  income  at 
source,  or  the  points  in  the  case  of  the  corporation.  Four-fifths 
or  above  of  the  revenue  from  the  proposed  income  tax  comes 
from  the  income  tax  reached  at  the  source.  It  does  not  depend 
in  the  slightest  degree  upon  the  good  faith  of  the  recipient  of 
the  income.  You  subject  the  income  to  the  tax  before  it  reaches 
him.  The  point  of  that  tax  that  is  reached  is  the  schedule,  where 
they  require  statements  to  be  made  by  the  recipient  of  the 
income.  It  is  impossible  from  the  nature  of  our  state  juris- 
diction to  levy  state  income  taxes  at  source.  Lawson  Purdy. 
First  Annual  Conference  National  Tax  Association,  p.  93. 


348  SELECTED   ARTICLES 

Many  theorists  advocate  an  income  tax  as  the  fairest  form 
of  taxation.  In  theory  there  is  much  to  sustain  it.  In  practice  it 
is  almost  universally  a  failure.  In  theory  it  seems  just  that  a 
person  should  be  taxed  upon  the  net  yield  of  his  occupation 
or  investments  as  the  best  gauge  of  his  taxable  ability,  but  in 
the  levying  of  such  a  tax  it  has  always  been  found  that  art, 
subterfuge,  evasion,  and  downright  perjury  have  rendered  the 
system  inefficient  and  futile.  To  tax  capital  property,  lands, 
and  also  the  income  arising  from  their  employment,  is  intolerable 
as  double  taxation ;  to  exempt  such  property  and  rely  upon  the 
income  from  them  alone  leaves  open  a  hundred  ways  for  evasion, 
and  is  open  to  grave  objections.  It  has  been  tried  in  several 
states,  but  has  proved  unsatisfactory  in  all,  and  it  is  a  potent 
argument  against  this  form  of  taxation  that  in  the  efforts  that 
have  been  made  in  most  states  of  the  Union  during  the  past 
ten  years,  to  find  new  sources  of  revenue,  there  has  been  so 
little  disposition  to  resort  to  income  taxes.  Report  of  the 
Special  Tax  Commission  of  Maine,  p.  36. 

Examination  of  these  various  laws  shows  a  lack  of  uniformity 
which  is  deplorable.  There  are  many  instances  of  double  taxa- 
tion. That  more  protest  against  double  taxation  has  not  been 
heard  is  largely  due  to  the  fact  that  the  states  having  income 
tax  laws  are  not  contiguous.  When  adjoining  states  pass  in- 
come tax  laws  having  the  same  diversity  and  variety  marking 
present  legislation,  the  situation  becomes  one  for  serious  con- 
sideration. 

If  we  are  to  take  as  a  criterion  the  legislation  on  income 
taxation  already  enacted  and  the  legislation  of  the  different 
states  on  inheritance  taxation,  it  is  futile  to  hope  for  very  much 
uniformity  in  income  taxation  for  many  years  to  come.  There 
must  be  concerted  action,  however,  to  prevent  double,  perhaps 
triple  or  quadruple,  taxation  of  the  same  income.  The  laws 
already  enacted  plainly  show  that  nearly  all  state  legislatures 
are  loath  to  permit  non-residents  to  go  untaxed  on  income 
received  within  their  state  borders.  There  is  also  a  strong 
tendency  to  tax  residents  on  all  income  received  from  intangibles 
regardless  of  the  source.  Frank  D.  Strader.  Proceedings  Na- 
tional Tax  Association.  V.  13. 

From  the  point  of  view  of  revenue  produced  the  income  taxes 
have  been  of  little  importance  and,  where  retained,  have  become 


TAXATION  349 

almost  a  farce.  This  small  yield  is  partly  explained  by  the 
special  character  of  the  taxes  imposed.  It  is  partly  explained 
by  careless  administration  or  failure  to  enforce  the  law.  And 
this  failure  to  enforce  the  law  has  been  due,  to  an  extent,  to 
the  fact  that  the  taxes  have  frequently  been  regarded  as  class 
taxes,  but  more  to  the  fact  that  their  administration  Has  been 
incidental  to  the  work  of  local  officials  while  the  revenue  was 
to  be  paid  over  to  the  state  treasuries.  And  finally,  where  an 
honest  effort  has  been  made  to  enforce  the  law,  the  opportun- 
ities for  evasion  have  proven  too  difficult  to  overcome. 

The  state  income  taxes  have  been  little  better  than  failures 
in  practice,  and  slight  improvement  can  be  expected  so  long 
as  we  rely  upon  the  personal  declarations  of  taxpayers  in  making 
assessments.  Our  experience  with  federal  and  state  income 
taxes  lends  no  hope  that  under  ordinary  circumstances  can  an 
income  tax  be  made  satisfactory  unless  by  getting  at  the  greater 
part  of  incomes  before  they  come  into  the  hands  of  the  indi- 
viduals who  bear  the  tax  burden.  But  unfortunately,  in  state  and 
local  income  assessment,  especially  if  the  taxes  are  supplementary 
to  property  and  corporation  taxes,  this  cannot  be  done  to  any 
great  extent.  State  and  local  income  taxes  are  not  at  present 
practicable  measures.  H.  A.  Millis.  First  Annual  Conference 
National  Tax  Association,  p.  444-5. 

The  income  tax,  although  advocated  by  good  authority,  seems 
to  be  more  proper  as  a  special  or  supplemental  tax,  where 
other  sources  of  revenue  fail,  or  for  special  demands  like  war. 

It  is  open  to  three  objections :  First  that  it  is  extremely  difficult 
to  collect  fairly — so  much  so  that  in  Germany,  where  that  tax 
is  laid,  the  proverb  runs,  "The  bigger  the  income,  the  bigger  the 
thief."  It  is  a  tax  which  is  more  readily  evaded  by  the  very 
rich  than  by  any  others,  because  it  pays  a  rich  man  to  employ 
the  best  counsel,  to  resort  to  legal  artifices,  or  to  remove  his 
residence  for  the  purpose  of  saving  a  considerable  sum  of  money, 
while  upon  the  man  of  moderate  circumstances,  especially  those 
on  a  salary  or  having  a  fairly  definite  professional  income,  it 
falls  with  redoubled  weight. 

Secondly,  even  a  graduated  tax  has  not  that  justice  which 
appears  on  its  face.  For  a  poor  man  with  a  large  family  to  pay 
anything  out  of  an  income  which  barely  supports  him  is  more 
of  a  hardship  than  for  a  wealthy  man,  who  has  only  himself  to 
care  for,  to  pay  a  large  proportion  out  of  his  superfluity.  In 


350  SELECTED   ARTICLES 

order  to  impose  anything  like  equal  burdens,  an  income  tax 
should  be  graduated  with  reference  not  only  to  the  amount 
of  income,  but  to  the  amount  of  necessary  expenditures,  and 
consequently  with  reference  also  to  the  social  position  of  the 
individual.  Thus  a  butcher's  foreman  with  $1,500  a  year  who 
lives  as  butcher's  foreman  and  men  of  the  laboring  class  usually 
do,  would  find  a  tax  upon  his  income  far  less  burdensome  than 
the  small  merchant  who  makes  $1500  profit,  but  whose  mode 
of  living  and  dress,  from  the  nature  of  his  occupation,  neces- 
sarily involves  a  much  larger  expenditure.  But  such  graduation 
would  be  impossible. 

Thirdly,  an  income  tax  is  paid,  if  paid  at  all,  entirely  out  of 
savings.  It  tends  to  discourage  frugality,  and  to  undo  the  very 
work  on  which  we  have  spent  so  much  trouble  in  establishing, 
a  savings  bank  system.  All  proposals  for  a  graduated  income 
tax  necessarily  provide  for  the  exemption  of  incomes  under 
a  certain  amount,  for  it  would  not  pay  to  collect  a  tax  on  a 
laborer's  wages.  If,  in  order  to  remedy  this,  its  payment  be 
made  a  condition,  it  opens  a  wide  door  for  corruption;  and,  if 
not  so  constructed,  such  a  system  would  exempt  the  greater 
part  of  the  public  from  all  share  in  the  public  burdens. 

"It  is  to  be  feared  therefore  that  the  fairness  which  belongs 
to  the  principle  of  an  income  tax  cannot  be  made  to  attach  to 
it  in  practice."  Bolton  Hall.  Public  Opinion.  13:53.  April 
23,  1892. 


UNIVERSTTV  OF 


BORKOWBD 

LOAN  DEPT 


Renewed  books  are  subject  t< 


(A9562slO)4T(,li 


YJ3     I  "7QOQ 


/  70 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


